Are Mutual Funds An Answer To All Your Financial Goals?
Apr 25, 2019

Author: Divya Grover

(Image source: Image by Nattanan Kanchanaprat from Pixabay)

Everyone wants to secure their finances while making sure their investments earn high returns. With a plethora of financial products available, finding the right one to invest can be a tedious experience.

Most people prefer to take the least risky option and prefer investing in bank fixed deposit, PPF, and other small saving schemes. Although your money will remain safe with these investment options, the returns you will earn will be inadequate to achieve your financial goals.

Other products may provide you with better returns than bank deposits, but lack the scope for customisation to suit your various needs.

What you need is a personalised bouquet of products that suit your risk profile, investment objectives, financial goals, and time horizon.

One such product that ticks all the boxes is Mutual Funds.

Mutual funds for tailor-made financial plans can be carefully selected to achieve various short-term, medium-term, and long-term goals. You can invest either a lump sum or a fixed amount regularly through Systematic Investment Plan (SIPs).

Here is how you can achieve various goals through various types of mutual funds-

1) Short-term goals

Short-term goals are the goals that you wish to achieve in the next 1-3 years. These can include an abroad vacation, buying an expensive gadget, motorbike, etc.

For your short-term goals, you can park your money in various debt funds such as Overnight Funds, Liquid Funds, Corporate Bond Funds, and Dynamic Bond Funds.

Liquid and Overnight Funds are a good alternative to bank FDs.

[Read: Liquid Funds v/s Overnight Funds: Where To Park Your Short-Term Money?]

Debt funds, on the other hand, are slightly more risky than liquid and overnight funds but less risky in comparison to an equity fund. Remember, debt funds are not safe!

Hence, if you are considering Corporate Bond Funds, and/or Dynamic Bond Funds, for your short-term financial goal, don't assume them to be safe; there's a credit risk involved.

Alternatively, you can also invest in Conservative Hybrid Fund, which invests a majority of its asset in debt instruments (75-90%) along with a small exposure to equity and equity-related instruments (10-25%).

2) Medium-term goals

The goals that you wish to achieve in the next 3-5 years can be termed as medium-term goals. These goals may include car purchase, your wedding plans, renovating/repairing your home, starting a business, etc. People generally take loans for these goals and pay high interest on it.

Instead, you can start investing a certain fixed amount regularly every month via SIPs depending on the corpus you wish for, let your money grow over the time period and accomplish the envisioned financial goal.

You can invest in a mix of Aggressive Hybrid Fund, a Large-cap Fund and/or a Multi-asset Allocation Fund for this purpose.

3) Long-term goals

If your investment horizon is more than 5 years, it can be termed as a long-term goal. This may include buying a dream home, planning for children's future needs - their higher education/ marriage, planning for your own retirement planning, among others.

For long-term goals, you can invest in equity-oriented funds as the time horizon permits you to consider high-risk high-return avenues. If you select equity-oriented mutual fund schemes carefully, over the long run it can prove to be a rewarding experience.

There are various types of equity-oriented funds available to achieve your long-term goals. You can diversify your investments across Large & Mid-cap Funds, Mid-cap Funds, Small-cap Funds, Multi-cap, and Aggressive Hybrid Funds.

You may also consider investing in Equity-Linked Saving Scheme (ELSS), which comes with a lock-in period of three years but can effectively help you get two birds with one stone. Meaning, potential capital appreciation and tax planning. Investment in ELSS is eligible for deduction up to a sum of Rs 1.50 lakh per annum (financial year) under Section 80C of the Income-tax Act, 1961. These funds invest in stocks across various market capitalisations and sector and are suitable for the medium-to-long term.

[Read: Should You Be Investing in ELSS At The Beginning Of The Financial Year?]

How to start investing in mutual funds?

  • Define your various short, medium, and long-term goals clearly

  • Ascertain your risk appetite

  • Determine the amount that will be required to invest to accomplish the financial goal

  • Select fund category you would like to invest in

  • Select mutual fund schemes of respective mutual fund houses

When you choose mutual fund schemes, make sure you do not overcrowd your portfolio.

And once you have started investments in a mutual fund, do not get influenced by short-term market fluctuations, but make it a point to review your mutual fund portfolio regularly to ensure you are on track to accomplish your financial goals. Review your portfolio at least once a year to check if the fund is able to perform well across the bull and bear phases.

[Read: Is Your Mutual Fund Portfolio On Track To Accomplish Your Financial Goals?]

Also, if there are changes in your goals due to any reason or if the fund is underperforming over a period of time, you can make the necessary changes in your portfolio.

Begin today!

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Happy Investing!

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