How to pick the right mutual fund category for your goals

The mutual fund industry offers over 34 different categories based on just two asset classes: equity and debt. This abundance of choice, rather than simplifying investment decisions, has made personal financial planning unnecessarily complex. The key to navigating this complexity is matching the right category to your specific financial goals.

Here’s a systematic approach to selecting mutual fund categories that aligns with what you actually need to achieve.

Step 1: Assess Your Financial Goal

Every financial goal requires its own mutual fund portfolio and separate SIP amount. Combining multiple goals into a single investment strategy creates confusion and increases the likelihood of falling short.

Start by defining three critical numbers for each goal:

• Target Amount: The corpus you need in future value terms. This determines how much you must invest monthly through SIPs.
• Time Horizon: The number of years remaining until you need the money. This directly influences your risk appetite and the fund categories you should consider.
• Priority Level: Not all goals carry equal importance. Categorise each goal as either non-discretionary or discretionary.

Non-discretionary goals are non-negotiable. These include your child’s education, a home loan down payment, or a retirement corpus. For these goals, you need an above 90% certainty of accumulating the required amount.

Discretionary goals are aspirational. A car upgrade, international vacation, or new gadget falls into this category. These goals can be delayed or modified without serious consequences.

Step 2: Calculate the Future Value of Your Goal

Most people make a fundamental error when setting financial goals. They calculate today’s cost and assume that amount will suffice in the future. It won’t.

Inflation erodes purchasing power consistently. Ignoring this reality turns every financial plan into an underfunded exercise.

Use realistic inflation assumptions for different goal categories:

• For automobiles, house down payments, and retirement planning, assume 5% to 6% annual inflation.
• For education or general lifestyle expenses, use 8% to 10% inflation.

Consider a practical example. You want to buy a car that costs ₹9 lakh today. Assuming 5% inflation for automobiles, your actual target is not ₹9 lakh. It is ₹10.94 lakh.

This difference of nearly ₹2 lakh is not trivial. Failing to account for it means you will either fall short or need to compromise on your goal when the time comes.

Numerous online calculators can help you compute future values quickly. The calculation itself is simple, but remembering to do it is what separates successful financial planning from wishful thinking.

Step 3: Select the Appropriate Fund Category

Your goal’s timeline dictates your risk-taking capacity, which in turn defines the expected returns of your portfolio. Without clarity here, you cannot calculate the required SIP amount accurately.

Risk capacity depends on three factors:

• Time Horizon: Longer timelines allow you to take more equity exposure because you have time to recover from market volatility.
• Liquidity Flexibility: You must decide how rigid your deadline is. Can the goal be postponed by a year or two if markets underperform?
• Portfolio Size: Larger portfolios can absorb volatility better than smaller ones.

The higher any of these factors, the more equity allocation your portfolio can handle.

Step 4: Calculate Your Monthly SIP

Once you have determined the future goal amount and identified the right fund category, calculating the monthly SIP becomes straightforward.

Use any online SIP calculator and enter three inputs: your future goal value, your time horizon, and the expected return based on your chosen fund category.

The calculator will show you the monthly investment required to reach that goal.

However, do not stop there. Add a buffer to this amount.

For non-discretionary goals, add 20% to the calculated SIP amount.
For discretionary goals, add 10%.

This buffer accounts for three realities: inflation might run higher than expected, taxes will reduce your final corpus, and your return expectations might not materialise exactly as planned.

Let’s return to the car purchase example. The goal is to buy a car that costs ₹9 lakh today, in four years. With 5% inflation, the future cost is ₹10.9 lakh.

Using a balanced advantage fund with an expected return of 9%, the SIP needed is approximately ₹19,000 per month. Adding a 10% buffer for this discretionary goal brings the final SIP amount to ₹20,900 per month.

If this amount exceeds your budget, you have only two sensible options: increase the timeline or reduce the goal corpus. Do not change the mutual fund category to chase higher returns. That defeats the purpose of risk-appropriate investing and exposes you to unnecessary volatility.

Why This Approach Works

This framework removes guesswork from mutual fund selection. You are not choosing funds based on recent performance or popularity. You are matching investment vehicles to specific outcomes based on timelines and risk capacity.

Most investors do the opposite. They pick funds first, then hope those funds will somehow deliver the returns needed for their goals. This backward approach explains why so many people feel disappointed with their investments despite markets performing reasonably well.

Financial planning is about finding the right mutual fund for each specific goal. The distinction matters more than most people realise.

Conclusion

This approach demands clarity about goals, honest assessment of timelines, and discipline in execution. It requires you to confront uncomfortable questions about affordability and priority.

Picking a trending fund based on last year’s returns is easier. It requires no planning, no calculation, and no confrontation with financial reality. It also produces mediocre results.
The choice between these two approaches is between intentionality and randomness in your financial life.

Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.