Goal-based investing in mutual fund?

You must have learned about the importance of goal setting in your school days and how it is fundamental to your long-term success. You need to clearly define your objectives or destinations and work accordingly to reach or achieve them. And like all other aspects of life, these teachings hold for your financial goals as well.

For example, you may want to own a house, purchase a car, or create a corpus for your retirement. Your financial goals can be short-term, mid-term, or long-term, and you need to make goal-based investments to achieve them.

What is goal-based investing? 

Goal-based investing refers to an investment strategy where individuals invest their money to achieve specific short-term, mid-term, or long-term financial goals.

For example, if you want to buy a car in the next two to three years, it can be your short-term goal. Likewise, if you’re going to create a corpus for your retirement or your child’s higher education, they are your long-term financial goals.

Once you have your financial goals in your mind and the period in which you wish to achieve those goals, you can start investing appropriate amounts in suitable instruments to achieve them. For example, if you wish to create a corpus of Rs. 10 lakhs in four years, you need to invest approximately Rs. 17,000 every month in an instrument offering 12% returns.

How can mutual funds help you achieve your goals? 

Mutual funds are one of the best investment avenues that can help you achieve all your financial goals. Below are some of the features of mutual funds that make them perfect instruments for goal-based investing:

  • Option to choose from a variety of mutual funds 

As an investor, you get the opportunity to choose from a variety of mutual funds, including equity, debt, and hybrid funds. These funds can be further subdivided into large-cap, mid-cap, small-cap, and multi-cap funds. All these funds differ from each other based on the risks they contain and returns they can generate.

Equity mutual funds are usually capable of providing high returns over a long time but are a bit riskier. On the other hand, debt mutual funds are relatively safer but also offer lower returns than equity funds. Hybrid funds, also known as balanced funds, are a mixture of both debt and equity funds. You can choose a mutual fund as per your financial goal and investment strategy.

For example, if you want to create a long-term corpus and have an investment horizon of more than five years, equity mutual funds would be ideal for you. However, if you are investing for short or mid-term goals and don’t want to risk your money, you can opt for debt mutual funds.

  • Invest through SIP or lump sum 

Another benefit of investing in mutual funds is that they allow you to invest either through a Systematic Investment Plan (SIP) or lump sum. When you invest a particular amount in mutual funds at periodic intervals, it is known as ‘SIP’. At the same time, a lump sum refers to the block investment made in mutual funds at a single instance.

The financial experts say the SIP can be your ideal tool for goal-based investing in mutual funds. It works just like a bank’s recurring deposit account, where you invest a fixed amount every month for a particular period and earn interest on your investment.

Moreover, mutual funds SIPs are highly customizable, which means that you can stop, increase, or decrease them anytime as per your financial requirements. And if not for SIPs, you can invest a lump sum in the choice of your mutual fund and allow it to grow until you achieve your investment objective.

  • Rebalance your portfolio from time to time 

The financial goals of a person keep on changing with time. For example, all they may want at a young age is to buy their favourite car or a gadget. However, as they grow old and get responsibilities on their shoulders, they start thinking about supporting their family and securing their financial future. Finally, as they approach their retirement, they start looking to create their retirement corpus.

With changing financial goals and requirements, it becomes crucial for investors to rebalance their portfolios from time to time. And with mutual funds, it can be done effortlessly. You can increase or decrease the quantity of equity and debt funds in your portfolio as per your future goals. You can also create different portfolios for your short-term and long-term financial goals.

The final words 

Mutual funds are widely regarded as the best instrument for goal-based investing. However, before starting to invest in mutual funds, you must be well aware of the risks associated with them. It’s prudent to conduct thorough research and analyze the past performance of funds before investing in them. You can also take professional help to make a more informed decision.