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Goal-based investing through mutual funds

Decide the asset class with your financial advisor that suits you, work backwards and calculate the amount you could invest through SIP or a lumpsum or a combination of both to reach your financial goals.

, ET Bureau|
Oct 17, 2019, 10.00 AM IST
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Financial planners are increasingly asking investors not to make random SIP investments in equity mutual funds. They advise investors to tag SIPs to their long-term financial goals

What does goal-based investing mean?
Every individual has life goals that he needs to reach in the short term or long term. Calculating and investing regularly to be able to reach that financial goal is called goal-based investing. For example, if you plan a foreign holiday with your family in early 2021, which is 18 months away, it can be called a short-term goal. If you wish to plan for higher education for your child who is two years now, you have 16 years, and it is considered a long-term goal. If you are 25 years old have started working and want to retire at 55, you have 30 years to plan for that goal and it is classified as a long-term goal.

How does one plan for goals?
The first step is identifying the goal for which you wish to invest and the time you have in hand to reach it. Once done, find the cost of the goal today. Add a reasonable amount of inflation to that, which will tell you the cost of the goal in the year you wish to accomplish that. Decide the asset class with your financial advisor that suits you, work backwards and calculate the amount you could invest through SIP or a lumpsum or a combination of both to reach the goal.

How can mutual funds be used to meet them?
Use the help of a qualified financial planner or advisor and identify mutual fund schemes based on your risk profile that can help you reach your goal. For example, if you plan for a foreign holiday 18 months from now which will cost you Rs 5 lakh, you could use debt or arbitrage funds to reach that goal. Since it is a near term goal and the time is less than three years, typically investment advisors would suggest you go for a combination of debt and arbitrage funds, which could yield you between 6-8%. Do your math, and decide whether you wish to opt for a lumpsum investment or want to stagger it. Do also keep the tax implications in mind, as debt investments less than three years are liable for short term capital gains tax. Similarly for your child’s higher education, which is more than 10 years away, you could invest in a mix of large-cap, multi-cap and mid-cap equity mutual funds.

Also Read

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