When you invest in mutual funds or other financial instruments, you must link your investing approach to your financial goals. This means that your savings and investments are mapped with a fixed financial target, encouraging disciplined investing. If you invest in mutual funds without tying them with a financial goal, your investment journey becomes unpredictable, flawing your long-term financial planning.
However, mutual fund investments allow you to link your investment with your financial goals to ensure you invest your hard-earned money wisely and maximize your returns. You can have short-term goals such as buying a car or long-term goals like retirement planning, buying a home, etc.
Here is how you can use mutual funds for goal based investment:
- Identify your goals: The first step is to identify your investment goal (why are you investing) and the period you have in order to achieve the target. Now, find out how much the financial goal costs today. Consider the impact of inflation, and you can estimate how much you need to save to achieve the goal. Once you determine the figure, you can create an investment plan to accomplish the set target. You could either choose to invest systematically through the SIP mode, go for a lump-sum investment, or keep a combination of both.
- Choose the mutual funds: After you have an investment goal in mind, you can identify mutual funds that align with your risk profile and help you achieve it. For instance, if you plan to buy a car worth Rs. 5 lakhs 18 months from now, you can use debt funds to achieve the goal. This is because debt funds are short-term-oriented investments that offer moderate returns with low risk. Debt funds would be ideal in your case since your investment time horizon is short (less than three years). Kindly note, short-term mutual funds (less than three years) attract short-term capital gains tax. However, for goal based investment, take into account the tax implications and the mode of purchase. You can invest in a lump sum or stagger your payments across your goal period. So, if your goal is to save for your child’s education, which is more than ten years away, you can invest in equity-based mutual funds. You could opt for a SIP of Rs. 5,000 monthly for 15 years. Assuming your mutual fund generates a 12% return, you can accumulate above Rs. 23 lakhs by the time your child needs the funds.
Overall, goal based investments allow you to plan your investments systematically and inculcate disciplined savings. Further, goal based investments help you stay focused on your goals and swiftly sail through the short-term volatile market phases.
You can use the advanced platforms offered by verified online investment apps, such as Tata Capital Moneyfy App, for goal based investments in mutual funds. These enable you to calculate how much you need to invest to accomplish your financial goal by considering your investment period, interest rate, the present value of your financial goals, and the existing saving corpus. Most of these apps account for the inflation rate and give you a realistic estimate.