We all have dreams, be it owning a house, a new car, saving enough to ensure your attends a prestigious college, planning a world tour, or building a healthy retirement corpus for you and your spouse. But how often do we pen down these goals and diligently work towards a plan for achieving these goals?Some of these life goals are short-term in nature such as buying a car while others are long-term in nature such as retirement planning.
But what exactly is financial planning?
Contrary to popular belief, financial planning isn’t mere investing. It is a due process. It permits you to manage your finances in a way that you can link it to your financial goals. While planning financial goals, different aspects need to be measured. Mutual fund investments can help one realise their life goals and hence itshould be chosen with one’s unique situation in mind and what works best for them.
The process of financial planning would help you address three questions:
- Where you are now, i.e., your current personal balance sheet
- Where do you want to be tomorrow, i.e., finances linked to your goals, and
- What needs to be done to reach your goals, i.e., the investment strategy and asset allocation that will aid you to achieve your financial objectives.
Developing a financial plan needs contemplation of several factors. First, the purpose for which your investments are being made needs to be defined crystal clear. The time period for your investments, also known as investment horizon is critical, as the longer the period of investment, the higher is the capability to absorb risks. Further, one of the most imperative factors that investors often forget to factor in their investments is inflation. Inflation has the potential to deplete your returns from investment considerably. Today’s expense of Rs5,000 will be Rs21,459 in 25 years if the inflation rate stays at 6% per annum.
Mutual funds as a financial planning tool: With so many types of mutual funds available such as equity fund, debt fund, etc., there is a mutual fund for each investor’s needs and objectives. Contrary to prevalent belief, mutual funds are not an asset class. They are vehicles that let you accomplish your financial plan.
In terms of the risk-return perspective, not only can you choose funds which are as safe as you want (such as debt funds or liquid funds), you can also invest in funds that can be as risky as you want (such as equity mutual funds or sectoral funds). In between, there are various types of funds that have different levels of risk. Not only are they cost-efficient, but they are also tax-efficient.
Remember to invest in mutual funds that cater to your personal needs and also stick to funds that have a constant, reputable record. Happy investing!