How To Adopt A Goal Based Investing With The Help Of Mutual Funds?

Mutual Funds

Over the past few years, mutual funds have exceedingly evolved to become a popular name in investments. As the name suggests, mutual funds accumulate funds from the investor having similar financial goals to invest in a portfolio of different assets with defined and clear investment goals. However, as there are different types of mutual funds and various schemes, selecting the right mutual fund as per your financial goal may be difficult.

Here’s a step-by-step process to invest in mutual funds as per your financial goal-

Prepare well

For any successful investment, in-depth preparation is a must. If you are a new investor, you may seek advice from a financial advisor to know about the benefits of mutual funds and how to proceed. However, if you are looking to learn and invest on your own, then begin by asking specific questions yourself like:

What are your financial goals? Do you want to invest for a comfortable post retirement life? Or are you looking for a strong financial backup to serve as a cushion in times of financial exigencies? Also, how long can you stay invested – 3, 5, 10 years, or more?

Find out answers to the above questions as knowing them will help you decide the type of mutual fund investment you must opt for. In the case of short-term financial goals of up to 3 years, investing in debt funds is recommended owing to their capital protection features. In the case of long-term goals of 5 years and above, equity mutual funds often must be the preferred choice as they can offer inflation-beating returns over the long run. And for mid-term goals of 3-5 years, hybrid funds may be selected as they try to attain maximum returns at the minimum possible risk.

Evaluate your risk tolerance level

All mutual fund investments have a certain amount of risk linked with them. Evaluate how much risk you are willing to take. The general investment mantra is higher the risk equals higher the returns. Thus, you must have a clear knowledge of your risk appetite before opting for any mutual fund investment.

For instance, if your risk appetite is low, then you may consider investing a higher proportion of your investment in debt funds to preserve your liquidity and capital. If your risk appetite is medium, then you may consider investing your maximum funds in hybrid funds. And in case your risk appetite is high, you may invest in equity funds, as they are extremely volatile during the short term but are known to beat inflation and fixed income instruments over the long term by a wide margin.

Understand the investment strategies and objectives when choosing funds

All mutual funds mention their objective and investment strategy to enlighten you about their fund management style and asset allocation strategy. Assessing the investment objective and strategies of the mutual funds help you understand whether the scheme matches your risk appetite, financial goals, and investment horizon. You can know the mutual fund’s investment objective and strategy by going through its literature, leaflets, KIM (Key Investment Memorandum), SID (Scheme Information Document), etc.

Begin choosing your mutual fund schemes

There are various parameters that you must factor in before selecting the fund like the performance of fund managers, expense ratio, fund house reputation, experience, etc. Also, you must ensure to check the fund’s past performance over periods like 1, 3,, 7, and 10 years. While previous performance does not assure the same performance in the future, striking a comparison allows you to know how the fund faced distinct economic conditions previously compared to its peer funds and benchmark indices. This helps you make an informed decision of whether to choose the fund.


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