Mutual funds are often suggested as the go-to investment avenue for meeting a variety of financial goals. Investments in mutual funds are different from savings, and they are certainly different from just depositing money or buying gold or property. A mutual fund investment should always be made with a clear insight into the plan and a clear mandate to accomplish a specific goal.

Having long-term financial goals is important for anyone looking to build wealth and security over the long term. Are you saving for your retirement? In the upcoming years, are you planning to purchase a home? Or do you want to take a trip abroad? Whatever your long-term or short-term goals, it’s crucial to be clear and ensure that your investments align with them.

Once you have your S.M.A.R.T financial goals set in mind, it’s time to plan your mutual fund investments or if you already have investments in mutual funds, take a good hard look at your current investment portfolio. Are your investments actually helping you achieve your long-term goals? Or are they merely present because, at the time, they appeared like a wise choice for investments? Or they were recommended by any friends or relatives with the intention of making a good profit.

You see, it’s okay to make changes to your portfolio if your investment does not align with your goal or even when your goals evolve due to changes in financial circumstances, don’t be afraid to sell off or switch from the investments that aren’t aligning with your long-term plans.

Most of you would be able to list down your financial goals with ease. Most of you would also be able to list down how much money you invest monthly. But the challenge here is, would you know if your investments are aligned with your goal?

If you are investing through Systematic Investment Plans (SIPs) in a mix of equity and debt mutual funds. Do you know which investment must be maintained until your children need money for higher education after 10 years and from which fund to withdraw money for the international vacation you are preparing after 3 years? Instead of investing haphazardly, it’s crucial to align the SIPs to the desired financial goals.

So here are some tips to keep in mind to ensure your mutual fund investments are aligned with your financial goals:

1. Define Your Goals

Be as specific as possible about what you want to accomplish and when you want to accomplish it. The first step is to segregate short-term and long-term goals, as your risk appetite for each may vary. For example, investing in a mutual fund to save up for a holiday next year is a short-term goal, and you may be more willing to take risks. On the other hand, picking a mutual fund to save money for buying a house is a long-term goal and will require a slow and steady approach. It is also a good practice to decide a time frame within which you wish to achieve the goals so that you know exactly how long you need to stay invested in a fund. The type of your goal, whether long-term, medium-term or short-term, will assist you in choosing from the various mutual fund schemes.

For example, for short-term financial goals, the investment should be made in a scheme that can give you an appropriate return and carry less risk. Similarly, for long-term financial goals, you should invest in a scheme which can give you a stable but high return while the risk is contained.

2. Know how much risk you could stomach

Regardless of the quantum of investment, you need to clearly understand how much risk you are willing to take. After all, this is your hard-earned money and investing in mutual fund schemes that do not match your risk appetite is a futile effort.

Your risk appetite depends on various factors, including age, personal and financial situation, investment horizon, etc. Don’t simply pick a fund because the returns look promising; carefully consider the risk involved and ask yourself if you are ready to bear it.

For example, if your risk profile is high, the investment objective is capital appreciation (over the long term), and the time horizon for your goals is more than 3 years, you may consider an SIP into hybrid mutual fund schemes which invests in both equity and debt instruments or equity-oriented mutual fund schemes. Conversely, if your risk profile is moderate to low, you wish to earn stable returns by preserving capital as far as possible and/or address short-term financial goals that are 3 years or less than 3 years away, you may look at debt-oriented mutual funds or a hybrid mutual fund scheme.

3. Allocate the assets wisely

Asset allocation is the key to successful investing in mutual funds. As the popular saying goes – “Never put all your eggs in the same basket”.

The best way to ensure that your mutual fund investments are aligned with your financial goals is to spread out your investments across different asset classes.

As mentioned earlier, you need to decide the time horizon of your financial goal; it plays a vital role in deciding what type of mutual fund investments are best suited to you. As a rule of thumb, the longer the horizon, the more sense it makes to invest in equity funds over debt as they become less risky over a long time frame.

  • For short-term goals – liquid funds, ultra-short-term funds, and short-term maturity debt funds are excellent choices as they provide stable returns over the short term. The investment duration of such funds ranges from a couple of days to a few months or less than a year and offers good returns with significantly less market volatility.
  • For medium-term goals – like purchasing a car or a luxury vacation, your investment horizon is 3 to 5 years. You can opt for hybrid mutual funds with a combination of both debt and equity. This will help you earn stable returns and also enjoy capital appreciation.
  • For long-term goals – such as planning for retirement or children’s education/wedding expenses, equity-oriented and aggressive hybrid funds can do the job. Investing over a long period can help leverage the potential of equity and aid in the wealth creation process. While these funds deliver higher returns, they are also highly risky. So make sure that you have a high-risk appetite before investing in them. You can choose from a large range of diversified equity funds such as large-cap/mid-cap/small-cap funds, etc.

Select the mutual fund schemes that meet your requirements best. You need to evaluate a host of quantitative and qualitative aspects of the respective schemes under consideration, plus understand the investment philosophy, characteristics of the underlying portfolio, and performance across market phases to check for consistency and the ideologies of the mutual fund house.

4. Keep realistic return expectation

While selecting the best suitable mutual fund schemes that align with your financial goals, you may consider evaluating the past performance of the scheme. However, do note that past returns are not an indicator of future performance. Hence, setting a high return expectation based on past track records can spoil your investment planning.

Keeping a realistic return expectation will help you reach all your financial goals on time, and you can accordingly switch your focus towards your next financial objective. Equity mutual funds may be considered as volatile over the short term, but it has the potential to offer higher returns in the long run. Similarly, debt allocation may provide the required stability to the portfolio and be less volatile, but at the same time, the return expectations must also be suitably toned down. In addition, if you find your existing investments consistently underperforming benchmark returns, then it is time to make a shift. Focus on risk-adjusted returns and switch to an alternative scheme to generate your required return expectation to reach your targeted goals.

5. Perform a Periodic portfolio review

As important it is to invest in worthy mutual funds, it is equally important to review the portfolio periodically. This helps in bridging the gap between the actual plans and the desired performance.

Investing and forgetting don’t work with mutual funds; you need to review the portfolio periodically to check the actual performance vs expected performance. Doing so can also help you to adjust the portfolio based on your current financial situation. Further, the risk profile also continues to change over time, and a periodical review can be a good time to rebalance the portfolio in line with the changes in asset allocation strategy and risk profile.

Moreover, if you want the mutual fund to help you reach your financial goal, it is extremely important to get rid of underperforming investments quickly. Also, a periodical portfolio review and necessary rebalancing will be desirable to adjust the portfolio with the changes in financial priorities and financial goals.

This article first appeared on PersonalFN here

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