Mutual funds can be an excellent investment avenue to achieve short-term or long-term financial goals. Be it to fund an international trip, build a corpus for your child’s education or create a retirement fund; it can help meet your objectives. All you need is a well- strategized plan which takes into account your investment horizon and risk appetite.
Here is how you can fulfil your financial goals by investing in mutual funds.
- Know your current financial status
The preliminary step of every good financial plan is to identify your existing monetary scenario. This includes assessing your present income, monthly expenses, investments and savings at the end of the month. This can help you know how much you need to save and the period by which you can meet your goals.
- Determine your risk tolerance
Each asset class has a certain degree of risk attached to it. Thus, it becomes crucial to know the risks involved and how much are you willing to part with. The risk you assume can depend on factors such as your age, income, time horizon and liquidity options of your investment.
For example, at 30, your risk appetite could be higher than if you are nearing retirement. Likewise, someone with a regular income and substantial emergency fund can invest in high-risk investment options, compared to one still in the early stages of their career and without sufficient emergency funds.
- Determine the asset allocation
Investors who know what is a mutual fund realise the importance of asset allocation based on the financial goals and investment horizon. If you have a long-term financial goal and looking to stay invested for more than five years, consider investing in equity funds. Equity funds can be volatile, but investing for the long-term can help beat market volatility. Or, you can opt for debt funds if your goals are short-term.
- Choose the right securities
With a variety of securities to choose from, it can be challenging about where to invest money. Ideally, you can consider investing in three to four flexi-cap/multi-cap/diversified funds across different sectors. Also, you might want to invest via more than one fund house. So, in case a particular fund underperforms, the rest of the investments can take care of the portfolio.
For long-term goals with higher risk tolerance, consider mid-cap/small-cap funds. Large-cap funds within equities work well for relatively lower risk appetite. Or, you could opt for liquid funds for financial goals within six months.
Once you are done with your financial planning through mutual fund investment, review your investment portfolio at least once a year. Also, SIPs can offer a disciplined approach to invest in mutual funds and could lower your risk from market volatility. Wise investment decisions can help you make the most from your investments.