When you invest with certain goals in mind, your investment strategy can be linked to those goals. With such purpose and clarity, the investments you make can be more fruitful and can generate the kind of returns you need in the required timeline to meet your goals. To undertake such goal-based investments, mutual funds tend to be a great investment option.
Mutual funds are investment vehicles that pool money from investors and invest it in various securities, such as stocks, bonds, and short-term debt. Today, there are different types of mutual funds such as equity funds, debt funds, and hybrid funds for different life goals.
These various types of mutual fund schemes reflect the different investment strategies that fund managers use to generate returns for their investors. Each type of mutual fund has its own risk level, investment horizon, and potential returns and targets specific goals. Let’s take a look.
For retirement
Retirement planning is a long-term goal to build a sufficient corpus to ensure your golden years are stress-free. Here, you can choose the Systematic Investment Plan (SIP) mode to invest in equity mutual funds since you can benefit from the power of compounding over the longer term and also benefit from the volatility through rupee cost averaging.
Consider this, you start a monthly SIP of Rs 10,000 at the age of 30. Assuming that your investment returns are 12% p.a. (an average rate of return for most equity mutual funds for long term), you continue to make investments for the next 30 years. Upon reaching the age of 60, you will build a corpus of approx. Rs 3.50 crore.
For children’s education and wedding
These goals usually have shorter time frames than retirement planning and thus require you to have less risk associated with your investment. Here, you can select aggressive hybrid schemes or large-cap mutual fund schemes. If the higher education of your child is more than 10 years away, you can invest in mutual funds.
Alternatively, if your child is five years old and you are saving money for their wedding for say when they turn 25, you can invest in an equity fund through a monthly SIP of Rs 10,000 for the next 20 years, which can accumulate to approx. Rs 1 crore at a 12% rate of return.
To get dual benefits of saving tax and growing corpus
Equity Linked Savings Scheme or ELSS qualifies for tax exemptions under section 80C of the Income Tax Act 1961. Investments of up to Rs 1.5 lakh can be used to claim tax deductions. ELSS comes with a mandatory lock-in period of three years, so it becomes a medium-term investment. You can choose to say invested in ELSS funds beyond the lock-in period as well since a longer investment horizon can generate higher returns.
For emergency
Unexpected emergencies can come at any phase in life. Be it a medical emergency or an urgent home repair, emergency situations always require adequate financial backing. Here, it would be wise to park some money as your emergency fund in liquid funds to avail the instant redemption feature. Liquid funds come with a maturity of up to 91 days and invest in debt and money-market securities.
Closing thoughts
Investing in the wrong scheme can put your finances at risk. Therefore, it’s crucial to understand how different types of mutual funds work and what goals they can achieve. Moreover, if you have different goal amounts and different time frames, it is advisable to undertake goal-based mutual fund investing separately for different goals to ensure each goal is getting the required attention.
