How can you select right mutual funds across tenures to achieve financial goals? A detailed guide

Mutual funds: If you are a new investor and have just started experimenting with mutual funds, it is vital for you to chart out a full-fledged investment plan that aligns with your financial goals—both short-term and long-term. 

There are broadly three categories of mutual funds — equity, debt and hybrid.

Equity: These funds include different types such as focused mutual funds, sectoral funds, large cap, mid cap, small cap, value funds and contra funds.

Debt: These funds include money market funds, liquid funds, overnight, corporate bond, long-duration funds, liquid funds and ultra-short duration funds.

Hybrid: These funds include multi-asset allocation, balanced hybrid, dynamic asset allocation, aggressive hybrid, conservative hybrid and equity savings funds.

Financial goals

There are different types of financial goals based on the time frame. These goals are as follows: 

A. Short term: There could be an expensive gadget that you are saving for, a designer bag you want to buy, or a vacation to Andaman that you want to experience.  

B. Medium Term: Medium-term goals could include a dream vacation to an exotic place such as the Seychelles or Australia, or buying a new SUV or renovating your office. 

C. Long-term: These include sending children abroad for their higher education, buying a dream house later in life, and, most importantly, a retirement plan. 

Aligning investment with financial goals

When you know what your financial goals are and are also aware of the investment options to choose from, it is recommended that you allocate your funds to different types of mutual funds based on your financial goals. 

However, it is important to first decide the amount needed to achieve a financial goal. Then, based on your expected rate of return, you can invest in a relevant type of fund.  

For example, when you are planning to save ₹10 lakh to buy a car after 3 years of investment, and the expected rate of return is 11 per cent per annum, then you would need to invest ₹23,572 every month via an SIP (systematic investment plan) to be able to accumulate ₹10 lakh after 3 years. 

The total investment you would need is ₹8.49 lakh. You can calculate this using the Goal SIP calculator, which can be accessed on AMFI’s (Association of Mutual Funds in India) website here.

Wealth creation: key points to remember

I. Long-term goals: For long-term financial goals, investors are expected to allocate a large chunk of investible sum to equity. For example, if you want to invest ₹30,000 every month to buy a property 10 years later, then you may want to invest around 70 per cent of this sum in equity funds, whereas the remaining 30 per cent can be invested in debt funds or corporate bonds.   

II. Medium-term goals: For medium-term financial goals, it is recommended not to bet too heavily on equity. Since equity – as an asset class – is risky and volatile, you would not want to botch up your investment plan in your quest to earn a higher return.  

Therefore, the ideal investment option would be hybrid mutual funds. There are different types of hybrid funds, and one can choose them based on risk appetite. These include conservative hybrids, aggressive hybrids, and balanced hybrids. 

Another sought-after hybrid fund is dynamic asset allocation funds which increase or decrease their debt-equity ratio based on market movement. You can read this article to know more about dynamic asset allocation funds.  

III. Short-term goals: For the short-term plan, it is advisable to invest heavily in debt mutual funds such as money market funds and liquid funds.  

“If your investment horizon is very short (a few days to 3 months) and you prioritise liquidity and safety, liquid funds are the preferred choice. If you can hold investments for a slightly longer period (3 months to 1 year) and want somewhat higher returns, money market funds are worth considering,” says Preeti Zende, Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

IV.  Review portfolio: Investors should also review their portfolio from time to time and do rebalancing.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.

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