Big or small, everyone has unique financial goals and ambitions. Some people want to renovate their ideal home or purchase an expensive gadget, while others may want to travel the world or pay for their wedding. And while it’s important to have these goals, it’s just as important to have a plan for how you are going to achieve them. That’s where goal-based investing through mutual funds comes in, which is a strategy of aligning your investments with your financial goals.
There are different mutual fund schemes that target specific investment objectives, such as growth, income, or protection of capital. And if you also have different goals with different time horizons, here are four steps on how to adopt a goal-based investing strategy with the right mutual funds.
1. Determine why you are investing
Before you invest in mutual funds, the first step is to sit down and list out all your financial goals. This could include things like buying a house, saving for retirement, funding your children’s higher education, etc. Your goals should be specific, measurable, realistic, achievable, and time bound.
2. Classify your goals based on the time horizon
All your goals can fall into one of three categories: short-term, medium-term, or long-term.
- Short-term goals are anything you want to achieve within the next one to three years.
- Medium-term goals are what you want to accomplish within the time frame of three to five years.
- And long-term goals are anything that will take longer than 10 years to achieve.
For example, if you want to save for your child’s higher education which is still 10-12 years away, it is considered a long-term goal. Here investing in equity mutual fund schemes makes sense as they have the potential to generate superior returns in the long term.
3. Evaluate your risk tolerance level
Determine how aggressive, moderate, or conservative your mutual fund investment strategy should be as per your risk appetite.For example, if you have a short-term goal with a low-risk tolerance, then you should invest in debt funds and bonds. Alternatively, if you have a long-term goal with high-risk tolerance, then you can invest in equity funds. If your risk appetite is moderate, consider investing in hybrid funds.
You can easily assess whether the scheme matches your risk appetite, investment horizon, and financial goals by going through its documents such as Scheme Information Document (SID) and Key Information Memorandum (KIM).
4. Periodically monitor your investments
You cannot invest in mutual fund schemes and forget about them. It is important to periodically monitor your investments so that you can make sure that they are still aligned with your goals and risk profile. This includes rebalancing your portfolio when needed as well as monitoring changes in the markets.
For example, if one asset class in your portfolio is not performing as expected over time, you need to be prepared to reallocate your assets accordingly.
With mutual funds, you can create your own goal-based investment strategy by determining your goals, purpose of investment, time horizon, and risk appetite. Moreover, mutual funds allow you to invest strategically in various asset classes dedicated to specific goals, thus, helping you achieve your goals faster.