Goal-based investing through mutual funds

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Benefits of Mutual Funds

Goal-based investing through mutual funds

Mutual funds can be a valuable addition to one’s investment portfolio owing to the multiple benefits they offer. The top benefits of mutual funds include high returns and diversification, among others. This is why an increasing number of investors are choosing to include tax saving mutual funds in their financial planning for a financially secure future. However, in some cases, investors tend to invest in random Systematic Investment Plans (SIPs) without identifying clear financial goals. 

This article can help you understand the relevance of goal-based investing to meet your financial goals.

What is goal-based investing?

You can invest in mutual funds in two ways – SIPs and lump sum. Many mutual fund managers advise investing via SIPs as the option can help average the purchase cost in the long run. 

But what should be your monthly SIP amount? For instance, an investor may invest a said amount to achieve a target of Rs.1 crore for a specific investment tenure. But without assigning a goal to the amount, they may or may not be able to build the targeted corpus, or the final amount may fall short for in the future.  

On the contrary, assume you have a goal of building a corpus for your child’s higher education, which is more than ten years away. This is known as goal-based investing. Or, you are in your 30s, and you wish to retire by 60. You can start investing for a long-term horizon of thirty years. This can become a long-term goal. 

How can you plan for goals?

Once you have identified the financial goal you wish to achieve, it is advisable to adjust it for inflation. Calculate the future cost of your current expenses. Work backwards and arrive at the amount you must invest monthly via SIPs or lumpsum, or a mix of both to meet your investment objectives. You can read more about SIP v/s lumpsum and the pros and cons of each investment mode to help make the right choice.

How can mutual funds help to achieve your goals?

It is imperative to assess your risk tolerance levels before you begin investing in mutual fund schemes. For example, if your goal is to go on an international trip after one year, which may cost around Rs.5 lakh, you can consider investing in debt funds. Since the investment horizon is less than three years, it is not advisable to invest in equity funds which needs an extended tenure to weather market volatility. 

Moreover, you must factor in the taxation aspects in your calculations. Short-term capital gains on debt funds are taxable as per the income tax slab, whereas long-term capital gains are taxable at 20% with indexation benefit.

Conclusion

If you are wondering where to invest money, it can be an ideal time to invest in mutual fund schemes. For long-term goals, you can consider investing in equity mutual funds for ten years or longer. For short to medium-term goals, debt instruments can be a perfect investment option offering stable returns with minimal risks. 

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