Aligning Mutual Fund Investments with Your Financial Goals

Published On: 16-Oct-2019

It is said, "If you don't know where you're going, any road will take you there." Just like you must know your destination before you start your journey, you must determine the financial goal before you start investing. You must have a specific financial goal in sight. Be it saving for your child's education, buying a new house or saving for your retirement, linking your investments with your financial goals help you accomplish your goal in a better way. 

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Mutual funds are steadily making entry into the household savings with the increased awareness about financial planning and higher efforts towards promoting mutual funds as an investment product. Further, the availability of a wide range of mutual fund schemes makes it easier for you to choose the mutual fund scheme to suit their financial goals. 

Alignment of the mutual fund investment plan with your financial goals be an important tool to select the optimal mutual fund schemes as per the time frame of the financial goal and your risk profile. This is because the investment horizon significantly alters the suitability of a mutual fund scheme for specific financial goals. For example, an equity scheme may be suitable for a financial goal to be achieved after five years but might not be ideal for a shorter-term financial goal, e.g. a family vacation after a year. Similarly, while an equity scheme is considered suitable for long term goals like retirement planning etc., the portfolio risk must be steadily reduced by shifting such investments to debt schemes as the financial goal nears its achievement timeline. 

This is how you align your mutual fund investments with financial goals:

1.     Define your Financial Goals – This is the first and the foremost step in the pursuit of a healthy financial future. One must define their short term and long-term financial goals. All the financial dreams and aspirations must be suitably quantified to identify it as a financial goal. Besides quantifying the goals, you must also decide a time frame within which you desire to achieve such goals. Taking a systematic approach towards your financial goals help you measure the portfolio performance objectively and thus, accomplish the goals effortlessly. 

2.     Decide the Asset Allocation – Defining the optimal asset allocation is the most vital process to align your portfolio with the financial goals. A prudent mutual fund goal planner will seek to construct an investment portfolio best suiting your risk appetite and the investment horizon. Depending upon how much volatility you tolerate within your portfolio, you decide the asset allocation across various asset classes, e.g., equity, debt, gold, etc. Equity may be considered as volatile over the short term, but it has a potential of higher returns. Similarly, debt allocation may provide the required stability to the portfolio and be less volatile, but at the same time, the return expectations must also be suitably toned down. 

3.     Periodic Portfolio Review – As important it is to invest, equally important is to review the portfolio periodically. This helps in bridging the gap between the actual plans and the desired performance. Also, a periodical portfolio review and necessary rebalancing will be desirable to adjust the portfolio with the changes in financial priorities and financial goals.

Further, to achieve the financial goals within the desired time frame, it is essential that the portfolio continues to perform well, and the underperforming investments are replaced with better performing funds. Further, the risk profile also continues to change over time, and a periodical review be a good time to rebalance the portfolio in line with the changes in asset allocation strategy and risk profile. 

This is how you align your mutual fund investments with your financial goals. However, these simple steps may be easier said than done. Make sure you do not lose track of your investing journey and achieve the desired goals in the desired time frame.