Here's Why You Should Avoid Investing in Mutual Funds Without a Goal

In response to this, Anita asked, "Do you have any specific goal in mind that you want to achieve?"

Rahul replied, "There is no goal as such, I will think about that later. For now, I just want to invest in mutual funds and gain from the upswings in the market."

To which I responded, "Rahul, it's a great idea to begin your investment journey with mutual funds; however, you need to have a goal in mind towards which you can path your investments. You see, investing in mutual funds without a goal is like a car without a steering wheel."

Why goal planning is essential for an individual to invest in mutual funds?

An aimless investment could make your hard-earned money go for a toss as you don't know how much to invest, where to invest and for how long to invest. If you start investing in mutual funds to chase high returns by seeing existing investors get exorbitant returns, you would end up losing money by investing in high-risk markets. Furthermore, if your only investment objective is to maximise return without considering any other factors, you run the risk of having to sell your investment at a loss if the market declines and the return turns negative. Determining your financial goals is the first step in doing appropriate financial planning, which is necessary to earn a meaningful return.

Planning your investments based on your financial needs or goals would let you know how much to invest in which category of mutual funds to reach your financial goals by taking minimum risks as per your risk-taking capacity. As a result, you will be mentally prepared to invest that amount and hold the investment until the objective is met.

Whether you have a formal financial plan or not, all of us have different financial goals in life. Some goals may be personal or family-specific (such as international travel, home or automobile purchases, etc.), while others may be stage-specific (such as saving for children's higher education, wedding costs, or retirement preparation). We need a specific sum of money in order to achieve each of these goals, whether they are short-, medium-, or long-term.

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A goal-based investment helps investors to decide on the right asset allocation required for their portfolio. Following a tactical asset allocation-based approach prevents an investor from getting affected by distractions in the short term, like high market volatility. At the same time, they can make wise decisions and reap the benefits from opportunities provided by the market.

Many investors choose amounts for their Systematic Investment Plans (SIPs) in mutual funds at random such as Rs. 1,000 or Rs. 5,000 every month, without having any particular goal in mind. It is advisable that investors set S.M.A.R.T. financial goals and align their SIPs to those objectives.

How investment in mutual funds can help investors achieve their envisioned financial goals?

With diverse opportunities available in the market today, mutual funds have grown to be a well-known choice, making them an excellent instrument for creating a solid investment portfolio and achieving a variety of financial goals.

However, do note that different mutual fund types have different investment objectives and characteristics. Establishing your financial goals clearly is crucial before choosing your mutual fund strategy. This will help you determine the duration, amount required for investment, and which scheme will suit your goals.

You can identify your financial goals with the help of a small exercise; ask yourself:

- What do I want my life to look like in five years?

- Do I want to own a car or a house?

- Do I want to be debt-free? Or Pay off my student loans?

- If you are married and kids are in the picture, Do I need to save for my child's education or wedding expenses?

- How do I imagine my life post-retirement?

Having concrete goals can make it easier to invest in mutual funds, as it provides a guiding light to work and make those aims a reality. You will need to break down your goals into short, medium and long-term goals to reach them successfully. Let us look at some common goals and the most suited mutual fund options to invest in for these goals.

• Saving for an international vacation or buying a car in 2-3 years:  This could be considered as a short-term goal. If you are planning a vacation that will take place in three years and your projected budget is around Rs 5 lacs, you must factor in the cost at that time. For this short-term goal, the best option would ideally be a debt fund with an average maturity of the fund commensurate to the investment horizon, or a hybrid fund, depending on your risk tolerance.

  Debt funds like low-duration funds, short-duration funds etc., are suitable for these goals. If your goal time frame is shorter, i.e. less than 1 year, then liquid funds and ultra-short duration funds are more appropriate investment choices.

• Tax Savings:  In order to save your taxes, you may consider investing in a mutual fund's Equity Linked Savings Scheme (ELSS) to claim a deduction from your taxable income u/s Section 80C of the Income Tax Act, up to Rs 1.5 lacs. Do note that ELSS funds carry a lock-in period of 3 years. Depending on your financial needs, you can invest for a medium (3 to 5 years) or long (more than 5 years) term; the longer your investment tenure, the higher can be the potential returns.

• Retirement Planning: This is a long-term goal which is usually delayed by many investors considering it to be a task for later years. However, the earlier you plan for your retirement, the better it is, and it will help you build a wealthy corpus to fulfil your post-retirement needs.

  Retirement planning is a long-term investment, and equity mutual fund schemes are known to provide significant returns in the long run. Different types of diversified equity mutual funds, like large-cap funds, multi-cap funds, midcap funds, small-cap funds etc., are suitable. Depending on your risk appetite and investment horizon, you may consider investing in these schemes. 

• Children's Education And Wedding Expenses: These are considered as long-term goals too, but their time frames are usually shorter than retirement planning. Large-cap funds, index funds, hybrid funds (e.g. aggressive equity-oriented hybrid funds, Multi-asset allocation funds etc.), gold saving funds like Gold ETFs etc., are suitable. You may wish to move to debt funds as you get closer to your goals in order to reduce the risk.

• Regular Flow of Income:  Mutual fund Systematic Withdrawal Plans (SWP) over long investment tenures are one of the most tax-efficient cash-flow solutions for investors, especially retirees who need regular cash-flows from their investments for long periods of time. Hybrid funds are ideal investment options for SWP because they have the potential to produce better inflation-adjusted post-tax returns over extended periods of time while having lower downside risks than pure equity funds.

SIP is the best route to invest in mutual funds over long investment tenures since you can benefit from the power of compounding and take advantage of volatility through rupee cost averaging, which may give superior returns. Consider gradually increasing the SIP amount if you want to reach your desired financial goals more quickly and comfortably. It ensures that the amount you invest grows at the same rate as your income and makes it easier for you to curb inflation effectively.

To conclude...

Many individuals find it challenging to select suitable mutual fund schemes that align with their financial goals. However, a thoughtfully constructed investment portfolio of the best suitable mutual funds linked to your goals can ensure success in achieving your financial objectives.

To achieve each goal within the given timeframe, you must estimate the amount of money needed, work backwards to establish how much you need to save each month, and decide where to invest. Therefore, you may consider PersonalFN's SMART Fund Explorer, which avoids the hassle of selecting mutual funds and helps you plan your mutual fund investments smartly.

All you need to do is simply state your S.M.A.R.T financial goals, such as the type of goal (buying a house, car, retirement, etc.), determine a suitable time frame for achieving them, and insert the amount of money that you are willing to invest towards your goal.

PersonalFN's SMART Fund Explorer considering the details entered provides you with two mutual funds investment options (A & B) that you can choose based on your risk profile. Further, you can also get instant access to the list of the best suitable mutual fund schemes as per your selected plan.

As we approach the New Year 2023, this is your opportunity to begin your wealth creation journey with a smartly selected list of recommended mutual funds by our research team. So what are you waiting for? Click on the key to accomplishing your financial goals with  PersonalFN's SMART Fund Explorer.

Warm Regards,
Mitali Dhoke
Research Analyst