When beginning your investment journey, you should start with financial planning as it will help you strategize your investments in a smarter way. Once you know your short term and long term financial goals, all you have to do is determine how much money you need to invest regularly so that at the end of your investment horizon you have come closer to the targeted amount.
A well-diversified investment portfolio knows how to mitigate the overall investment risk and is usually able to generate better returns than a concentrated portfolio. These days, investors do not want to invest in conservative schemes knowing that interest rates in India have hit an all time low. However, they can still give their savings a chance to grow by investing in market linked schemes like mutual funds.
A mutual fund is a pool of professionally managed funds that pools money from investors sharing a common investment objective and spreads its Asset Under Management (AUM) across various asset classes like equity, debt, gold, etc. There is a common misconception among investors that all mutual funds invest in equity markets, but that is not true at all. Mutual funds also invest in debt instruments and fixed income securities like corporate bonds, government backed securities, treasury bills, commercial papers, reverse repo rates, CBLO, etc.
Which mutual funds to choose for financial goals?
Before narrowing it down to any time of investment scheme, investors must first understand what their goals are. Once they have a defined set of goals, investing will automatically become simpler. Different mutual funds invest in different asset classes and securities. They have different portfolio maturity and hence, it is essential for investors to study each mutual fund product in detail to determine whether their investment objective aligns with that of the scheme.
So, if you are starting your investment journey with mutual funds, the first thing to remember is to spread your portfolio across asset classes. An ideal mutual fund portfolio can have a 75 percent allocation to equity and a 25 percent allocation to debt. However, there are no hard and fast rules which mean investors must diversify their mutual fund portfolio based on their risk appetite, investment time horizon, and financial goals.
Debt funds for short term goals and emergency fund
Debt funds are generally considered by investors to give their investment portfolio the much required liquidity. You can build an emergency fund with a liquid fund or overnight fund, as these schemes have a very low average portfolio maturity period. These funds even offer an instant redemption facility whereupon withdrawal of the units, the money is transferred to your registered account within 24 hours. Also, to tend to short term goals that need to be achieved within 12 months, investors can consider debt funds.
Equity funds for long term wealth accumulation
Equity funds are best suited for investors who have a long term investment horizon and want to achieve financial goals that require a long term wealth creation plan. Since these funds heavily invest in the stock market, investors should not consider them for short term investing. Over the long term, equity funds may minimize their overall investment risk and might be able to generate decent returns throughout market cycles.
Mutual fund for tax goals
Saving tax is essential because why do you want to give a chunk of your hard earned money to the government? You can save tax by investing Rs 1.5 lacs every fiscal year in Equity Linked Savings Scheme (ELSS), the only mutual fund scheme under Section 80C of the Indian Income Tax Act, 1961 that comes with a tax benefit.