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Why Aligning Mutual Fund Investment As Per Financial Goal Is Important

Adhil Shetty

Mutual Funds if aligned with financial goals help in creating wealth. For best results, you should align the investment portfolio as per your updated financial situation. 

Why Aligning Mutual Fund Investment As Per Financial Goal Is Important

Mutual Funds have emerged as one of the most popular investment instruments in the past one year, especially after demonetisation. With a wide variety of options available, you get the opportunity to diversify your investment in Mutual Funds itself.

The best result from Mutual Fund investments can be derived only when they are aligned with your financial goals. For example, for short-term financial goals, the investment should be done in a scheme which can give you appropriate return and carry less risk. Similarly, for long-term financial goals, you should invest in a scheme which can give you a stable but high return, while risk is contained.

For example, if you want to buy a car after 6 months, then investing in an equity scheme would not make much sense for such a short period, so debt fund could be a better option. Similarly, if you are looking to buy a car after 2 years, then you can select the appropriate equity scheme for getting a high return.

There are few important points that you must keep in mind when you align your financial goal and Mutual Fund investments.

Ensure Safety Of Your Capital Investment

Mutual Fund investment is subject to market risk and you must keep this is mind when you invest the money. You must diversify the investment across Mutual Fund schemes to earn the desired return as per your financial goal. It’ll ensure the safety of your invested capital and also help you to get an attractive return even if the market does not perform exactly as you would have expected.

Do Not Compromise On The Liquidity Factor

It is important to ensure easy exit when you invest money in Mutual Funds. There are some Mutual Fund schemes which restrict investors from withdrawing money before stipulated time period and if they withdraw money earlier than the stipulated period, then they may be penalised. Also, some Mutual Funds offer high risk, high return option, while some give low risk, low return option, so you should carefully choose your options to avoid any kind of losses.

For example, you invest in small and midcap Mutual Fund schemes which carry high risk and return profile. You stay invested for a year and due to a sudden financial emergency decide to redeem the fund. You may book a loss on your invested capital if the market is on a downward trend. So, you should invest the spare money in a high-risk scheme to ensure that you can book profit only when the return is appropriate.

Tax Implication Shouldn’t Be Ignored

The profit that you earn from Mutual Fund investments are taxable depending on the nature of the fund. If you book profit in a debt Mutual Fund scheme before completion of 3 years of investment, then such profit is called short-term capital gain (STCG) and it is taxed at the respective income tax slab rate of the individual. Long-term capital gain (LTCG) is taxed at a 20 % rate with indexation benefit. Similarly, profit on an equity Mutual Fund booked after one year of investment are considered as LTCG and it is exempted from tax. STCG from equity scheme is taxed at a 15 % rate. If you invest in the Equity-linked saving schemes, then such investment is eligible for tax deduction U/s 80 (C) of IT Act.

In the long term, tax benefit could make a substantial difference in your overall return from the portfolio. So, you must keep tax implications in mind while selecting a fund for achieving your short- or long-term financial goal.

Keep Realistic Return Expectation

Setting a high return expectation can spoil your financial planning. Keeping a realistic return expectation will help you get all your financial goals on time and you can accordingly switch your focus towards your next financial objective.

Review Your Investment Strategy On a Regular Interval

You may have started investing in Mutual Funds as per your financial goal and you may have achieved the goals on time as well, but still, you should review your investment strategy. It is important because your risk capacity and financial profile change over a period of time, therefore you should align your investment portfolio as per your updated financial situation for getting the best result. Reviewing the investment strategy will always keep you close to your financial goal and it may also help you to achieve beyond your expectations.

Mutual Fund investments shouldn’t be assumed as a one-time event. It should be a regular process. Use Systematic Investment Plan (SIP) and SWP depending on the requirement of your short- or long-term financial goals. Once you get the desired corpus within a specified period, then you should cut the risk on your investment by shifting the fund to a low-risk Mutual Fund scheme and ensure the safety of your fund to accomplish your financial goals.

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