Personal Finance

Mutual funds - One pill for all your financial goals

Friday, 23 Feb 2024
Source/Contribution by : NJ Publications

The majority of Indian investors do not have a structured approach to savings and investment. The amount of money saved is determined by their spending patterns rather than a savings target. In a similar vein, most people invest haphazardly. When they have enough money, they invest it all without any specific goal—in bonds, stocks, post office small savings plans, bank FDs, etc.

Every individual has financial goals that are unique to  their needs. Some of these goals could be short-term like a foreign holiday which is 12-15 months away or mid-term like owning a car after 4 years, while others could be long-term oriented like funding your 3 year old child's higher education or having a financially protected retirement.

Whatever your needs might be, there are mutual fund schemes to help meet them. Mutual funds are a one-stop solution to all of your financial goals. There is a mutual fund basket for every type of investor; whether you are a conservative or aggressive investor, have a short-term or long-term goal, have a small or large amount to invest. You can use a variety of mutual fund schemes with various investment objectives to accomplish your financial goals.

SEBI allows Indian fund houses to offer different types of schemes for investing in different kinds of assets. Mutual funds come in all shapes and sizes, but choosing the right mutual fund scheme for your financial needs is the real question. Your objectives for mutual fund investments can vary, such as generating a regular income, wealth accumulation or capital preservation. Let us look at some of the common goals and the most suited mutual fund options to invest in for these goals.

  1. Retirement Need
  2. If your age is 35 years and you retire when you are 60, you have 25 years, making this a long term goal. The most suited mutual fund scheme category for this goal is Equity Diversified Mutual Fund which aims to achieve long-term capital appreciation through diversified investments. These funds invest across various sectors, thus reducing risk. Other than this, there are retirement oriented schemes offered by various mutual funds with specific features to cater your retirement needs.

  3. Child's Higher Education or Wedding
  4. Child's higher education is also considered as a long term goal, however, here the time frame is usually shorter than retirement. The mutual fund categories that can be looked at for this type of need are Equity Diversified Mutual Funds, Balanced Advantage Funds and Aggressive Equity Oriented Hybrid Funds. Other than this, there are solution oriented Children's fund which aim at funding future life events such as a child's higher education or wedding. If you would have done an SIP of Rs. 5000 every month, 15 years back for child's higher education, assuming a return of 12%, you would have accumulated Rs 23.79 lakh.

    Moreover, other than the above mentioned mutual fund categories, you can invest in Gold Funds to achieve your need related to purchase of gold for your Child's marriage.

  5. Tax Saving
  6. Mutual Funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same. ELSS investments are eligible for tax deductions up to Rs. 1,50,000 in a financial year under Section 80C of Income Tax Act. Investing in ELSS funds can offer significantly higher returns in the long run than most other tax-saving investment options like PPF, NSC, NPS and 5 year Bank Fixed Deposits. ELSS funds serve a dual purpose of tax saving along with wealth creation.

  7. Regular Income
  8. SWP's can be very beneficial for investors who need regular cash flows from their investments for a long period of time. SWP stands for systematic withdrawal plan. If you invest a lump sum in a mutual fund through SWP, you may choose how much you want to withdraw on a regular basis and how often. SWP allows investors to generate both monthly revenue as well as an accumulated sum at the end of the maturity period. Hybrid funds such as Balanced Advantage Funds are good options for SWP as they have low risk as compared to equity funds and at the same time have potential to generate higher inflation adjusted returns in the long term.

  9. Parking of Funds
  10. If you are an investor looking for an option to park your surplus funds for a few weeks or even a few days, there are mutual funds available for you. Overnight funds and Liquid funds allow investors to make better use of extra cash they have in their hands. Compared to bank deposits, these funds are capable of providing better returns at minimum risk and also enable investors to access their funds efficiently and quickly.

  11. Other Goals
  12. If you have any goal other than the ones mentioned above, then classify it on the basis of tenure and risk profile. There are different types of mutual funds available based on your risk profile. If you are a risk taker, you would lean more towards equity mutual funds. If you are more risk averse, you would lean towards hybrid or debt mutual funds.

    Moreover, there are funds for all needs— short, medium or long-term. For long-term goals, equity or diversified equity funds which invest nearly 65%-80% in equity can be considered. For medium-term goals, choose balanced or hybrid funds that invest in equity and debt in a 60:40 ratio. For short- term goals of 1-3 years, consider short-duration debt funds since they offer lower volatility and better interest than bank accounts.

  13. Conclusion:
  14. Mutual funds come in many different forms, and there is a mutual fund for everyone. Your financial goals together with your risk taking capacity determine which mutual fund(s) are best for you. You can consult a financial advisor or a mutual fund distributor who can handhold you throughout your investment journey and help you make the right decisions.

We offer our services through personal counsel with each of our clients after understanding their wealth distribution needs. Our approach is to enable our clients to understand their investments, have knowledge of investment products, and that they make proper progress towards achieving their financial goals in life.

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