- Date : 08/04/2021
- Read: 6 mins
You can leverage mutual fund investments to meet your financial aspirations in a structured and timely manner.
As unique individuals, we have different financial needs. And these needs constantly evolve over time. For instance, you might be saving up money to travel abroad six months later, or planning to upgrade to a bigger car. A few years down the line, as you start a family, saving for your child’s education can become an important goal. Then there’s the down payment on the dream house that you intend to buy. And ultimately, you will have to make enough money to lead a comfortable post-retirement life.
That is a diverse mix of short, medium, and long-term financial goals. Given the ever-increasing cost of living, it is essential to not only save, but invest strategically to help meet these goals, and mutual funds are a good bet. Whether you are looking to build wealth at a moderate pace over the long term or park your funds for short-term gains, mutual funds can help you create a diversified investment portfolio and fulfil your financial objectives.
Mutual funds are a one-stop solution, offering something for all age groups, wallet sizes, and both conservative and aggressive investors. But with so many types of mutual fund options, it can get quite overwhelming to choose one. The first step is to understand your own needs and figure out what your goal is. Once that is decided, consider the amount of risk that you’re willing to take – which will largely depend on your age and career stage.
In addition to the tenure of your investment, your risk appetite should be a key determinant when picking a mutual fund. For instance, if you’re wary of frequent market fluctuations, you would want to steer clear of high equity exposure, but if you’re willing and able to take on risk, equity funds can be highly rewarding. Ultimately, it all depends on how averse you are to taking financial risks.
Goal: Tax planning
Equity-linked savings scheme (ELSS)
Who doesn’t enjoy saving on taxes? ELSS is specifically created to enable tax savings. With ELSS you can not only save tax, but also create wealth. Your ELSS investment allows you to claim deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act and save up to Rs 46,800 in taxes. Depending on your financial needs, you can invest for a medium term (3–5 years) or long-term (5+ years). Being equity-linked, they have the potential to give higher returns compared to other other tax-saving instruments. ELSS comes with a lock-in period of 3 years; the lowest among all the options available under section 80C.
Related: Equity Linked Savings Schemes: High returns + tax savings (Part I)
Goal: Buying a house
Dynamic asset allocation fund
Owning one’s own house is a life-long dream for many. It is probably the biggest purchase one makes. While you can avail of a home loan, you will have to make a down payment, which can be a big amount in itself. Dynamic asset allocation funds are an ideal way to mobilise funds for the down payment of your house. These are hybrid funds that invest in a mix of equities and debt instruments. With rule-based models to decide the best equity-debt combination, hybrid funds keep rebalancing the mix based on the market conditions as they aim to generate the best possible returns for the risk taken.
Related: Different types of funds available under mutual funds
Goal: Regular income
Systematic withdrawal plan
For those looking for a steady stream of income, a systematic withdrawal plan is a good option. It allows you to withdraw a fixed amount from your mutual fund at regular intervals (either monthly, quarterly, half-yearly, or annually) as per your requirement.
Related: Planning to start a mutual fund SIP? Here’s what you need to know
Goal: Retirement corpus
Diversified equity fund
It is never too early to start planning for retirement. Ideally, you should start as you enter your 30s. This way, you can start investing aggressively in equity funds and grow a sizeable retirement corpus. Although risky, choosing the right equity fund can help you outperform the broader market and deliver even better returns than the benchmark index. Here's how to choose an equity mutual fund
Asset allocation fund
As you grow older, your investment portfolio also needs to evolve based on your changing risk appetite and financial circumstances. Asset allocation funds are synchronised with your life stage – they progressively reduce exposure to volatile assets like equities and gradually move to more stable options such as bonds, deposits, and cash as you age. These funds are a good choice if you want to leave the rebalancing of your asset allocation to your fund manager.
Related: How debt and equity based mutual funds differ in risk
Goal: Child’s education and wedding
Index fund
A relatively safe option, index funds invest in the stocks that constitute their benchmark index in the same proportion as their weightage in the index. As a result, they match the performance of the benchmark. This is great for investors who are satisfied with index returns and are not too keen on beating it. This kind of passive investing is also a lot cheaper than actively managed funds. Investing in these funds is suitable for long-term investors who have an investment horizon of at least 7 years.
Gold fund
Gold is considered auspicious and is an integral part of weddings in our country. To flaunt the precious metal for your child’s wedding, you can start buying units of gold exchange traded funds (ETFs). Each unit is equal to 1 gram of 24k gold. Buying gold in the form of paper is cheap, safe, and convenient. You can also liquidate these investments easily. Using mutual funds to plan for and fund your child’s education.
Related: Regular plan or direct plan: Which mutual fund option is best?
Goal: Saving for the near term
Medium-term debt fund
Medium-term debt funds can help you fulfil your near-term goals. If you’re planning to buy a car six months from now, you can park your funds in less volatile medium-term debt funds, which perform well when interest rates drop. Being delinked from the stock market, they are stable and well-suited to save for financial goals that are 12-15 months away.
Related: Savvy millennials betting big on Mutual Funds
Last words
Choosing any mutual fund randomly won’t do the job of achieving your goals. It’s important to understand different mutual funds in terms of risk and what each can achieve. You have a variety of mutual funds to choose from, each with a different investment objective, so take time to do your research before you commit. What do market losses mean for mutual funds? Read this article to get answers to your queries.
As unique individuals, we have different financial needs. And these needs constantly evolve over time. For instance, you might be saving up money to travel abroad six months later, or planning to upgrade to a bigger car. A few years down the line, as you start a family, saving for your child’s education can become an important goal. Then there’s the down payment on the dream house that you intend to buy. And ultimately, you will have to make enough money to lead a comfortable post-retirement life.
That is a diverse mix of short, medium, and long-term financial goals. Given the ever-increasing cost of living, it is essential to not only save, but invest strategically to help meet these goals, and mutual funds are a good bet. Whether you are looking to build wealth at a moderate pace over the long term or park your funds for short-term gains, mutual funds can help you create a diversified investment portfolio and fulfil your financial objectives.
Mutual funds are a one-stop solution, offering something for all age groups, wallet sizes, and both conservative and aggressive investors. But with so many types of mutual fund options, it can get quite overwhelming to choose one. The first step is to understand your own needs and figure out what your goal is. Once that is decided, consider the amount of risk that you’re willing to take – which will largely depend on your age and career stage.
In addition to the tenure of your investment, your risk appetite should be a key determinant when picking a mutual fund. For instance, if you’re wary of frequent market fluctuations, you would want to steer clear of high equity exposure, but if you’re willing and able to take on risk, equity funds can be highly rewarding. Ultimately, it all depends on how averse you are to taking financial risks.
Goal: Tax planning
Equity-linked savings scheme (ELSS)
Who doesn’t enjoy saving on taxes? ELSS is specifically created to enable tax savings. With ELSS you can not only save tax, but also create wealth. Your ELSS investment allows you to claim deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act and save up to Rs 46,800 in taxes. Depending on your financial needs, you can invest for a medium term (3–5 years) or long-term (5+ years). Being equity-linked, they have the potential to give higher returns compared to other other tax-saving instruments. ELSS comes with a lock-in period of 3 years; the lowest among all the options available under section 80C.
Related: Equity Linked Savings Schemes: High returns + tax savings (Part I)
Goal: Buying a house
Dynamic asset allocation fund
Owning one’s own house is a life-long dream for many. It is probably the biggest purchase one makes. While you can avail of a home loan, you will have to make a down payment, which can be a big amount in itself. Dynamic asset allocation funds are an ideal way to mobilise funds for the down payment of your house. These are hybrid funds that invest in a mix of equities and debt instruments. With rule-based models to decide the best equity-debt combination, hybrid funds keep rebalancing the mix based on the market conditions as they aim to generate the best possible returns for the risk taken.
Related: Different types of funds available under mutual funds
Goal: Regular income
Systematic withdrawal plan
For those looking for a steady stream of income, a systematic withdrawal plan is a good option. It allows you to withdraw a fixed amount from your mutual fund at regular intervals (either monthly, quarterly, half-yearly, or annually) as per your requirement.
Related: Planning to start a mutual fund SIP? Here’s what you need to know
Goal: Retirement corpus
Diversified equity fund
It is never too early to start planning for retirement. Ideally, you should start as you enter your 30s. This way, you can start investing aggressively in equity funds and grow a sizeable retirement corpus. Although risky, choosing the right equity fund can help you outperform the broader market and deliver even better returns than the benchmark index. Here's how to choose an equity mutual fund
Asset allocation fund
As you grow older, your investment portfolio also needs to evolve based on your changing risk appetite and financial circumstances. Asset allocation funds are synchronised with your life stage – they progressively reduce exposure to volatile assets like equities and gradually move to more stable options such as bonds, deposits, and cash as you age. These funds are a good choice if you want to leave the rebalancing of your asset allocation to your fund manager.
Related: How debt and equity based mutual funds differ in risk
Goal: Child’s education and wedding
Index fund
A relatively safe option, index funds invest in the stocks that constitute their benchmark index in the same proportion as their weightage in the index. As a result, they match the performance of the benchmark. This is great for investors who are satisfied with index returns and are not too keen on beating it. This kind of passive investing is also a lot cheaper than actively managed funds. Investing in these funds is suitable for long-term investors who have an investment horizon of at least 7 years.
Gold fund
Gold is considered auspicious and is an integral part of weddings in our country. To flaunt the precious metal for your child’s wedding, you can start buying units of gold exchange traded funds (ETFs). Each unit is equal to 1 gram of 24k gold. Buying gold in the form of paper is cheap, safe, and convenient. You can also liquidate these investments easily. Using mutual funds to plan for and fund your child’s education.
Related: Regular plan or direct plan: Which mutual fund option is best?
Goal: Saving for the near term
Medium-term debt fund
Medium-term debt funds can help you fulfil your near-term goals. If you’re planning to buy a car six months from now, you can park your funds in less volatile medium-term debt funds, which perform well when interest rates drop. Being delinked from the stock market, they are stable and well-suited to save for financial goals that are 12-15 months away.
Related: Savvy millennials betting big on Mutual Funds
Last words
Choosing any mutual fund randomly won’t do the job of achieving your goals. It’s important to understand different mutual funds in terms of risk and what each can achieve. You have a variety of mutual funds to choose from, each with a different investment objective, so take time to do your research before you commit. What do market losses mean for mutual funds? Read this article to get answers to your queries.
