How To Use Mutual Funds For Your Financial Goals

We all have money goals. Some may be aspirational, such as buying a new car or upgrading our home. Others may be uncompromisable – such as a child’s education or building up a nest egg before we retire. Regardless of the kind of goals at hand, they all require advanced planning and structured, disciplined saving in order to reach fruition.

Till some time back, fixed-income instruments such as bank deposits used to form the backbone of goal-based savings for most of us. In recent times, though, there has been a steady shift towards the widespread adoption of Mutual Funds as a tool for Financial Goal achievement. The total industry assets recently are nearing the 40 lakh crore mark as on date.

If you’re contemplating using Mutual Funds to plan for your future Financial Goals, here are five tips to radically improve your chances of succeeding.

Start with a Plan

Instead of just making Mutual Fund investments in an ad-hoc manner, or just informally mapping your goals onto an excel sheet, start with a comprehensive Financial Plan. Doing so will lend a lot more perspective to your goal-based savings by helping you analyze your cash flows better, often eliminating or reducing unnecessary recurring expenditures and freeing up more surpluses for your goal based investments. Revising your Financial Plan annually will also keep your savings aligned to your changing life scenario always.

Ignore your risk appetite

Regardless of your personal risk appetite, you need to make the time remaining to your goal as the single deciding factor for fund selection. For instance, you may be a risk-averse investor, but that wouldn’t justify choosing low-risk debt funds for a retirement goal thirty years away. In this case, the cost of conservatism may run into lakhs or crores! Additionally, the long-term nature of your goal would absorb much of the risk of losing capital. Conversely, even flamboyant risk-takers need to adopt a more muted stance while planning for short-term goals. Investing into equity-oriented funds for a goal that’s just two or three years away could give rise to a scenario where you’ll need to book losses while pulling capital when your goal date arrives.

SIP it

Instead of investing money towards your goals as and when surpluses become available, inculcate discipline into your goal-based savings through monthly SIPs (Systematic Investment Plans). If you don’t put your goal-based savings on auto-pilot through SIPs, you’ll surely find it taking a backseat every month in the face of some large ‘unplanned’ expense or the other.

Step it up annually

Start with whatever is comfortable – but make sure you step up your goal-based savings at regular intervals. Many Mutual Fund SIPs have built-in “step up” features that automatically step up your outlay periodically by a pre-decided percentage. Stepping up your monthly SIPs can make a huge difference to your long-term wealth creation, greatly improving your chances of achieving your financial goals.

Tracking is key

It’s an unfortunate truth that many a well-intentioned goal-based investment falls by the wayside within a few months or years of getting started. Using a professional software program to “keep score” can go a long way in keeping you aligned with your end objectives. A tracking tool that measures your goal achievement to date, distance left to your goal, and other important parameters can contribute more to your success than you think! As Karl Pearson once said: “What is measured, improves”.