Sometimes, we spend a lot more time in planning a holiday than in planning for our financial goals. Maybe because holidays are a lot easier to plan – especially when you know where you are starting from, where you want to go, how much time you have, and how much you are willing to pay. Investing in mutual funds too, is a lot like this.

Here are a few questions to help readers identify the correct mix of mutual funds to have in their investment portfolio.

Where am I? Where do I want to reach?

As you start planning your finances, it is very important that you take stock of your current portfolio and asset mix - What is the proportion of your existing investments between equity, fixed income and gold? Then, note down your key financial goals such as buying a car, a home or child’s education or marriage and target value of each goal.

By when?

Now assign a timeline to each goal . This action has an important bearing on the type of fund to choose, as equity funds are best for long-term goals (10+ years), hybrid funds for medium-term goals (4-8 years) and conservative fixed income funds for goals that fall within the next 2-3 years.

What is my goal amount?

Take target value of each goal and increase it by a reasonable inflation rate to arrive at the amount you will require . For example, if you are saving for a car that costs about Rs 5 Lakh today, with a horizon of 3 years, assuming 5 per cent inflation in car prices, you should target having around Rs 5.79 lakh at the end of three years.

How much?

Generally people are used to making investments in lump-sum amounts (FDs, insurance premiums, etc). In most cases lump-sum amounts meant for investing are collected by people over a period of time. People need to realise that while they spend money on a regular basis, they must also start investing on a regular basis. Systematic investment plans (SIP) are a great way to begin regular investments. SIPs are not only easier on the wallet and reduce the risk of one-time lump-sum investing; they also encourage disciplined savings approach.

For SIP investments, check if you are saving enough by assuming a reasonable growth rate based on past long-term average SIP return. For example, Large Cap funds have given 14-15 per cent SIP returns in last 10 years. Balanced Funds have delivered 12.5 per cent while MIP and Income Funds have a SIP return of 7.5-8 per cent. If your saving is not enough, try increasing the SIP amount little by little every year to help bridge the gap.

What is my risk appetite?

While it may be attractive to allocate your investment money in the asset class known to offer the highest return (that is, equities), it is very important to invest according to your risk appetite. This depends on multiple factors such as your age, your current savings, time to goal date, etc. Thus, someone who is saving to buy a car after 1 year will have a more conservative investment mix compared to someone who is saving for his retirement after 20 years.

Do I need multiple funds and facilities?

Investors need to understand the use of options like Systematic Investment Plan (SIP), Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP) to best manage their investments. Thus, saving for a long-term goal like retirement, it is ideal to use SIP in equity, which can then be incrementally moved to low-risk fixed income funds using STP as the retirement date approaches. Post-retirement, the amount can be withdrawn for meeting expenses using SWP.

After you are clear on the type of funds you need to invest in, look at the track record of the funds in that category. Choose funds that have a long-term record of consistent performance.

(The writer is Co-Chief Investment Officer, Birla Sun Life AMC.)

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