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How to use mutual funds to realize life goals
05 Jan 2023

Your investment activity must begin with a goal in mind. Of course, by goals we mean financial goals and a financial goal is one where your dreams can be measured and reduced to rupee terms in the form of future cost. Having identified and delineated your goals, the next task is to action your plan to meet these goals. Obviously, if your money is idle and not earning anything, then you are never going to be able to meet these goals. That is where your investment plan comes in handy.
Most financial planners rely heavily on the power of mutual funds to help their clients meet their long term and medium term financial goals. While there are many options like direct equities, debt, gold and endowment products available in the market, the preference has been for mutual funds as the optimal option in most of the cases. Here is why
A palate of product combinations on offer
That is perhaps the biggest advantage you can get in a mutual fund. Equity funds can help you meet your wealth creation needs. Debt funds can help your meet your need of stability and assured income. Your liquidity needs can be met either through money market funds or through ultra short term funds. Even if you want to take an exposure to specific underlying assets like gold or indices, you have the ETFs that specifically cater to the same. Above all, if you want to create a dual advantage proposition of wealth creation and tax planning then ELSS (Equity Linked Savings Schemes) funds can be a great option.
A product mix for each life stage
Over your entire financial planning career you will go through various stages. You will be single, then you will be married and later you will have kids. Then of course, you need to plan for your car, your home and your exotic holiday. As you grow older you need to prioritize commitments like your child’s education, child’s marriage, your own retirement etc. How do mutual funds achieve all these goals? Firstly, many mutual funds offer you straight forward options to manage your child’s education and your retirement. You can just put money in these funds and leave the rest to the fund manager. Secondly, tweaking the mix of equity and debt is another way of prioritizing your goals and that is something mutual funds offer you; the flexibility of doing the same with minimum hassles. All these factors make mutual funds a great choice across life stages.
It is a good trade-off between returns and risk
The basic rule of financial planning is that every action has a cost associated with it. Not investing or being too conservative in investing has a cost in the form of lower returns. Too much aggression and risk in allocation makes you vulnerable to the risk of potential losses. Then, of course, there is the risk of your underlying assets performing well. The entire activity, therefore, is a massive trade-off. How do individuals with limited access to information and insights manage the trade-offs? Mutual funds ensure that you do not have to worry about the trade-offs. The fund manager takes care of most of the risk management either through diversification or through portfolio tweaking. Either ways as an individual investor, your focus will purely be on your overall portfolio allocation only. The fund manager effectively takes care of the rest.
Professional management is what you can bargain for
Investing has become a lot more complex today than even before. Technologies are changing at a rapid pace and companies are losing competitive advantage at a much faster rate than even before. Once global giants like Kodak and Nokia do not exist any longer. If you compare the Sensex constituents of 1990 and 2017, there are just a handful of names that are common. Many erstwhile titans have fallen out while new entrants from IT, banking, pharma and telecom have sneaked in. The moral of the story is it is almost impossible manage all these shifts and tweak your portfolio accordingly. That is where mutual funds play a pivotal role. With professional fund managers supported by incisive analysts, sharp dealers and with mountains of information to sift through, they certainly have a major advantage.
Mutual funds can, therefore, play a key role in helping you realize your long term goals. Apart from the advantage of professional management and the flexibility, mutual funds also bring with them an automatic alignment with a goal-based approach to financial planning.

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