Exploring Mutual Funds for Financial Needs
In today’s quickly evolving dynamic world, our needs and aspirations are constantly changing. According to Maslow’s theory of need hierarchy, once basic physiological and safety needs are fulfilled, we move to love and belonging, self-esteem, and finally, self-actualisation. When these needs come into the picture, we move from basic needs of food, clothes, and shelter to higher personal growth and, with that, a pursuit of a higher standard of living.
A higher standard of living might mean getting the first car or a home for some, and it may mean moving into a big bungalow and going on a foreign vacation for others. However, fulfilling any of these needs requires a huge chunk of money, which may not be readily available at your disposal. Hence, you must invest your hard-earned money in order to fulfil these financial needs in the long term.
Choosing the Right Product
To invest your hard-earned money, many products are available, such as gold, fixed deposits, and mutual funds. However, if you look at the real rate of returns, i.e., the returns after considering the impact of inflation on these products, mutual funds have outperformed by far.
Source:
Gold - Reliance Money Precious Metals, MCX (Period - March 1998 - March 2023)
Fixed Deposits - Handbook of Statistics on Indian Economy, RBI (Period - March 1998 - March 2023)
Inflation - Handbook of Statistics on Indian Economy, RBI (Period - March 1998 - March 2023)
Mutual Fund - ACE MF, Returns of Sensex TRI (Period December 1998 - December 2023).
Mutual Funds for Your Financial Needs
Mutual funds offer a great way to fulfil financial needs and build wealth in the long term. With a disciplined and consistent investment route offered by SIP in mutual funds, one can build a good, sizeable fund through small systematic investments. The table below shows different financial needs and how you could have fulfilled them if you had started an SIP or invested lumpsum over the past years.
| Financial Need | SIP Amount | Lumpsum | Term | Current Value | XIRR |
| Retirement Plan | Rs 10,000 | 25 | Rs 2,77,59,841 | 15.06% | |
| Retirement Plan | Rs 10,00,00 | 25 | Rs 3,48,97,71 | 15.26% | |
| Child's Education | Rs 10,000 | 18 | Rs 81,53,127 | 13.29% | |
| Child's Education | Rs 10,00,000 | 18 | Rs 97,91,832 | 13.50% | |
| Home | Rs 10,000 | 10 | Rs 26,27,506 | 15.04% | |
| Home | Rs 10,00,00 | 10 | Rs 38,81,175 | 14.52% | |
| Travel | Rs 10,000 | 5 | Rs 9,37,562 | 18.06% | |
| Travel | Rs 10,00,00 | 5 | Rs 21,25,784 | 16.27% |
Source: Ace MF. Returns of Sensex TRI. Assuming the SIP interval as the 10th of each month. The investment periods taken into consideration are -
- 25-years - Dec 1998 to Dec 2023.
- 18-years - Dec 2005 to Dec 2023.
- 10-years - Dec 2013 to Dec 2023.
- 5-years - Dec 2018 to Dec 2023.
SMART Financial Needs - Before starting to invest, it is very important to quantify your financial needs. Your financial needs should be specific, measurable, achievable, realistic, and time-bound. Once you set SMART financial needs, you can build a roadmap to fulfil these needs. It is also important to dedicate a different SIP/Lumpsum investment for each one of your financial needs.
Risk Profile
The stock market is inherently volatile; hence, when investing through the mutual fund route, it is essential for investors to have an understanding of their risk appetite and risk tolerance. Risk appetite refers to the level of risk an investor is willing to assume, and risk tolerance is the amount of risk an investor can take based on his financial position and income level. On the basis of risk appetite and risk tolerance, a risk profile can be built, which can be useful in choosing the right asset class.
Diversification and Asset Allocation
“Diversification is the only free lunch in the world.” - Harry Markowitz. Diversification is an essential strategy used to mitigate the risk of an investment portfolio. Diversification and asset allocation are closely connected. To diversify the risk in our mutual fund portfolio, an investor should allocate investments across different asset classes. Additionally, it is imperative to choose the right asset allocation based on our risk profile so that we can appropriately distribute our investments across various asset classes. This provides stability and security to our portfolio, as each asset class comes with different levels of risk and returns. In this way, we can fulfil our financial needs and build wealth in a secure and strategic manner.
Emotional Biases
Investors, in general, are driven by their emotions, such as greed, fear, and anxiety. However, making decisions on the basis of such emotions can lead to losses and missed opportunities. Timing the market is also not possible; hence, the best strategy for investors to build wealth is to be patient, remain calm at times of market volatility, and stay invested until financial needs are fulfilled.
Tax Implications
Different mutual fund schemes have different kinds of tax implications. Moreover, you can get tax benefits as well when you invest through ELSS. Before investing, one must gain a clear understanding of their tax slabs and invest in the schemes most suitable for them.
Regular reviews
Once an investment is made, it is very important to regularly review your mutual fund portfolio. Through regular reviews, one can ensure that their investments are on track to fulfil financial needs. Regular reviews also give a chance to take corrective action. In case of any deviation on the path of building wealth, one can rebalance their mutual fund investments to align them with their financial needs.
Seek guidance
For a smooth mutual fund investment journey, one must always consider getting guidance from a mutual fund distributor. A mutual fund distributor can understand your financial needs and risk profile and provide tailored guidance. Moreover, an MFD can handhold you through the investment process and help you make informed decisions.
To conclude, investing in mutual funds is an efficient way to fulfil financial needs. Through mutual funds, investors can focus on need-based investment which can not only help fulfil financial needs but can also help build wealth. However, to efficiently manage your mutual fund investments and emerge as a successful investor in this journey, the guidance of a mutual fund distributor can really make a difference. Start your mutual fund investment journey today with the guidance of an MFD!