We spend each stage of our life planning for the next financial goals on the list of our different requirements and duties. Mutual fund investment has emerged as a preferred mode of investment option. The key to achieving your financial goals through mutual fund investment lies in how well you align them to your goals.
Types of goals
The first step on the journey towards achieving your financial goals is to segregate them as long and short-term goals. A financial obligation like building an emergency corpus, going on a dream vacation, making the down payment for a new car etc. that you may need to fulfill in about 3-5 years can be termed as a short term or at best a medium-term goal. However, goals like building a corpus for your children’s higher education, marriage or your own retirement, are long term goals as they require a longer time frame of mutual fund investment for adequate capital appreciation. Different goals require investment into different types of mutual funds in order to achieve the target corpus.
In this article we will specifically discuss your long-term goals and how to plan for them using different types of mutual funds.
Investing for the long-term goals
The first thing that you should consider while planning for your long-term needs is the time horizon you have. Ideally for long-term capital appreciation you should at least have 7-10 years in your hand to allow your investments to grow. Next you need to determine your risk appetite.
Here are the different types of mutual funds that you may invest in based on your risk appetite and investment horizon.
Types of mutual funds
These are the types of mutual funds and how you can align them to your long-term needs.
- Equity Funds: These funds give long-term capital growth and are of many types. If you are a new investor, then a passive Index fund like a Nifty 50 fund can give you good exposure to the top 50 funds in the equity market without the requirement of you going into too much analysis about the fund. Index funds track the performance of a benchmark like the Nifty 50 or Sensex. For the long term, you may invest in Large, Mid or Small Cap depending on your risk appetite, where Large Cap funds offer the least volatility in the equity funds category, and the small cap funds are the most volatility prone category. Other funds in the large cap category are sectoral and thematic funds that invest in a particular sector or theme but should be only considered if you have adequate knowledge and experience in these types of mutual funds.
- Hybrid Funds: As a thumb rule, the higher risks of equity mutual fund investment are associated with higher returns. However, if you are a conservative investor who wants to take minimal risks with reasonable capital growth then you would need to invest in funds that give you fixed income coupled with capital protection. Hybrid funds are the types of funds that offer you the stability of debt instruments coupled with the growth of equity investments. Within the hybrid category, you can go for the Aggressive hybrid fund with 75-90% of equity assets in its portfolio and the rest in the debt securities.
Contact your financial advisor or a mutual fund distributor to understand which mutual fund investment can suit your long-term financial goals.
