How Mutual funds will help you achieve your goals

Goals offer us a purpose and drive our actions. In the words of Mark Pincus, American Internet entrepreneur, ‘Not having a clear goal leads to death by a thousand compromises.’

Goals offer us a purpose and drive our actions. In the words of Mark Pincus, American Internet entrepreneur, ‘Not having a clear goal leads to death by a thousand compromises.’

We all understand that we need to lay our goals in the pecking order, but we still get trapped into improvising our investments and being haphazard about it. We put in our energies into providing for one upcoming event and lose direction and thereby we end up with a directionless portfolio. These investments are unlikely to mirror any of our goals.

Warren Buffett once told his pilot that in order to reach his goals, he needed to do three things. The first was to list down his 25 top goals, and then circle the top 5 most important.

You must have come across somebody who would have claimed that he invested in a stock, which yielded him more than 40% return in a year. Should you be tempted to go for it? If you do, it would be speculating without thinking about your goals.

We often get trapped into such intriguing situations and thereby sticking to a goal or even setting is forgotten. Setting investing goals reveals the amount of investment needed for a specified tenure to yield the desired corpus. We achieve clarity on how much do we need for eventualities, for fulfilling monthly requisite SIPs and when to redeem from mutual funds as our goals near. And we thereby stop following the herd.

Let us look at the type of goals most of us have as a household:

Before elaborating each goal, let us understand the what and why about goals.


There are various types of long term goals. I have stated the most important ones below:

Retirement planning –

Let us assume there are two investor, A & B. They start working at the age of 20.

Investor A starts investing Rs. 1000/- per month right from the start of his career for the next 10 years. That’s a total investment of Rs. 1,20,000/-. He leaves the investment in the market for next 30years, until he is 60 years old.

Investor B starts investing after initial 10 years of his career. But to build a nest he starts investing Rs.1000/- per month for the next 30 years. That’s a total investment of Rs. 3,60,000/-.

Assuming a market return of 8% p.a., who do you think would have a larger retirement fund at the age of 60.

Investor A has contributed a lot less than Investor B, but due to the power of compounding, Investor A has a retirement nest of Rs. 20,13,000/- whereas Investor B has managed to accumulate a wealth of Rs. 15,00,000/-.

This is the power of compounding and starting early towards long term goals even with relatively smaller amounts.

Children’s Education –

“Education is the key to unlocking the world, a passport to freedom” – Oprah Winfrey.

Every parent wants the best for their children and rightfully so. Education has always held a special significance in our lives and we always believed that good education is the key to success and don’t we all want our kids to be more successful that ourselves.

Thankfully to achieve our goal, today we have multiple options in the field of education that we can provide to our children. However, these options are expensive.

So, what can help us provide for our kids college enrolment?

We need to plan through a multiple step process:

  1. Calculate the time horizon, the time remaining to enrol the child for graduate or post graduate course.
  2. Estimate the cost of education – the future cost not the current cost. Many people forget to factor in the evils of inflation while estimating the future cost of education. If the current cost of a post graduate course is Rs, 5,00,000/- and your child will be eligible for that course in 10 years time, then assuming an inflation rate of 5%, the likely cost of the course in 10 years would be Rs 8,14,447/-. So, we would need to provide for Rs 8,14,000/-.
  3. Once we know the cost of education, we need to determine how much we need to save monthly to achieve this goal. The earlier we start the lower the amount required to the saved per month. In the above example, investing Rs 3000 per month for 10 years would help one create a corpus of around Rs 8.4 lakhs at a CAGR of 15%.

What kind of funds are suitable for retirement planning and children education goals?

To start with, both retirement and children’s education, need to planned much in advance. Since the time frame for these goals is minimum 8-10 years, you can invest in equity funds. One can start by investing aggressive small cap and large cap equity funds. These funds have higher exposure to equity and hence could have volatile returns. However over a longer period of time, these funds also provide higher returns.

  1. 1. Large Cap Funds invest in large-cap companies. The stock prices of these companies are considerably stable compared to overall market.
  2. 2. Small-Cap Fund is extremely vulnerable to market ups and downs and carry higher risk. However, the reward for choosing higher risk is the attractive returns.

As we get closer to the college enrolment date or retirement age, we should start allocating some funds out of these small cap and large cap equity funds into balanced funds to reduce volatility towards the end. A strategy that gradually grows more conservative over time requires that us regularly rebalance the portfolio and ease up on your stock weighting as you get closer to our goal.

Medium Term Goals

One could ask, why do one need mutual funds for buying a house? That’s what mortgage loans are for. Well the loan to value ratio for mortgages is max of 75% for any home loan above Rs 75,00,000/. So, one needs to provide a substantial amount for down payment. Plus we have stamp duties and registration charges to be covered. This may require a lump sum amount which may need to be planned 4-6years in advance.

Another medium-term goal could a self owned car which we may have set our eyes on when we started working at the age of 20 with a target of buying the same before we reach 25 years of age. Such goals need same financial planning and regular savings which need to be invested to generate returns.

To achieve such medium term goals, you can take calculated risks by making investments in a balanced fund. When one opts for a balanced fund, their money gets invested in debt and equity instruments together. The debt portion works as a cushion and covers the impact if the equity portion is unable to reap great rewards. However, a combination of debt and equity largely increases the investor’s chances of reaping attractive returns with just a fair percentage of risk.

Short Term Goals

While investing for longer term you are looking for capital appreciation and hence can take risk volatility of returns on your capital in near term but if the investment horizon is short term then the objective is more about safety over growth. You also need to ensure liquidity of your investment at the right time also matters when it comes to investing for short term goal or emergency fund.

While considering investment avenues for short term goals typically traditional instruments like fixed deposit pop up. Bank fixed deposit have been the first choice so long primarily because it does not fluctuate your capital. However taxation (TDS is deducted on deposit interest) and cost of liquidating them before maturity gives a bigger blow when short term investments are considered.

Mutual funds have various categories of schemes that cater to short term investments which can help you in meeting your short term goals like planning for holidays or wedding or buying electronic gadgets or house renovation to name a few. These are goals with typically 1-3 target date.

Here too, the goal can impact the choice of short-term funds:

  1. For very short-term goals and for emergency fund you have to invest in liquid funds or ultra-short-term funds as emergency fund is a corpus which you may need immediately as and when emergency arises and hence liquidity and minimal exit load are critical drivers. These are funds that invest primarily into money market or short tenure liquid instruments but provide the flexibility to redeem the funds at short notice with minimal or no exit load.
  2. If your goal is 3 years away, you can invest in an income fund or dynamic bond fund. These funds typically invest in corporate paper and are able to generate higher returns than bank fixed deposits in most cases.
    Most importantly, unlike fixed deposits, no TDS is deducted on the interests earned in case of a Short-Term Debt Fund. Further Investors enjoy an indexation benefit when they invest in Debt Funds for a period exceeding 3 years. So even if the gross return is the same as Fixed deposits, these funds can provide higher post tax return depending upon the investors tax bracket.

Goal of Tax Saving

As mentioned earlier, we need to start investing to achieve short term, medium term and long term goals simultaneously. The obvious question would be how is it achievable? Hence we feel the pressure to prioritize and for most of us retirement saving is typically the most ignored goal in our scheme of things as it appears distant and one does not feel a pressing urge to address it.

However, our desire to save tax every year can be channelled to help us achieve two goals with one investment: tax saving and investing for retirement.

Equity Linked Savings Scheme (ELSS) has turned out to be a popular tax saving and wealth creating instrument. While being an equity diversified fund, ELSS is riskier than the fixed-income-products available for tax-saving, ELSS has the shortest lock in and offers the potential of growth via equity. Thus, we can start to save for retirement by considering ELSS to achieve this as well as save tax under section 80C.

ELSS has a lock in of 3 years from the date of investment post which the scheme turns open ended. Rather than redeeming, it makes sense for the fund to be invested to meet a pre-decided goal.

Goal of Regular Income

We have discussed about starting early to build a retirement pool but have not discussed what does one do once we actually retire. Fluctuations in income from investments may not be desired post retirement as investment income could be the primary source of income. So regular income is of prime significance.

Mutual funds can provide regular income through 2 modes:

  1. Monthly Income plans option for a regular income involves investing in mutual funds with a monthly divided option. Most of these funds allocate only 10-20% of their corpus into equities and the rest 80-90% in safer bonds and other debt instruments.

    MIP presents relative safety as these funds offer investors good returns if stock markets do well, but they also protect the downside because of the limited exposure to equities.

    However, there is no assurance of monthly income. Since there is presence of equity, MIP returns can be volatile. The scheme could suffer losses, making dividend payouts irregular - both in quantum and frequency. At times, the scheme may not pay any dividend at all.
  2. Systematic Withdrawal plans.

    The Monthly Income Plan The returns are not spectacular as compared to equity funds because of lower risk, but are enough to beat inflation.

Benefits of Planning

We tend to spend several hours researching and planning when wanting to buy an electronic gadget or a party or a holiday. But for financial planning – which is most critical for leading an independent life, we do not find time.

Therefore, it’s time to write down our goals and plan how we are going to achieve them.