Why Should You Invest Considering a Financial Goal?

Goal-based investing is an approach towards investing that is linked with your financial goals. It maps down your savings and investments towards a fixed financial goal. Goal-based investing aims to bring a sense of discipline to your investing method.

It majorly focuses on; age, income, and outlook.

Some common financial goals:

Financial goals are classified into 3 types, one is a short-term goal. They consist of smaller financial targets that could be achieved within a year. For example, getting a new computer or planning a marriage, or home renovation.

Whereas, mid-term goals could take about 5 years to achieve. These are the types of goals that you have planned later down the road. For example, getting a car or saving for a home loan down payment.

The last type is the long-term goal. They require proper planning and determination as the duration increases 5+ years. Since you won’t need the money right away, consider investing the money you are saving for a long-term financial goal. For example, saving for a child’s education, Investing for your retirement plan, etc.

How does one go about selecting the right or the most appropriate or investment product?

Selecting the most appropriate goal solely depends on your future needs. As per the time horizon, one should focus on selecting their financial goal. For example, a child education plan is the best long-term investment for your child. Nowadays, the fees of courses are already so expensive. 

Say you invest 10,000 monthly for 18 years. As you will be needing money by the time your child turns 18. If we expect a return of 11% your investment could grow to Rs. 68.01 lakhs* after 18 years. The power of compounding will grow your wealth exponentially.

Figure out your requirement. Figure out whether you want a short-term, mid-term, or long-term goal. Accordingly, plan for it!

How do we manage the risk of these investment products?

Time horizons of the goal lead us to select the most appropriate goal. There are 2 reasons for this, 1st when you select an equity product, the risk of investing in equity gets mitigated over the long term.

If you invest in an equity product for over 1 year, there is a 60% probability that you’ll make money. But if you extend the time horizon to 3 years the probability of making money in equity increases to 75%. On a 10-year basis, almost 99% of you’ll make money.

This is how you reduce the risk of investing in the equity market.

Types of Mutual Fund Based on The Nature of Investment

 ‘Half-knowledge is worse than ignorance’ -Thomas B. Macaulay

Before making any kind of investment in mutual funds, it becomes very important to have in-depth knowledge of its types and what each of them has in store for investors. The investment objective is the deciding factor in any portfolio of a mutual fund scheme.

For example, an investor Akshay wants to invest in an equity fund so as to obtain capital appreciation via investment, whereas another investor Anjali wants to opt for the hybrid mutual fund so as to diversify the risks. So, the portfolio which will be prepared by the fund manager in both cases will be different, owing to the difference in their investment objectives.

Let us now move ahead and have surficial knowledge about the types of a mutual fund based on the nature of the investment. The types are mentioned as followed- 

1.  Equity fund - Funds that usually invest the pooled money in equity shares of a company are known as equity mutual funds. The securities of equity mutual funds are listed on the stock exchange.

Some examples/ types of equity funds include- Market segment-based funds, sector funds, thematic funds, strategy-based schemes, dividend yield schemes, value funds, growth funds, etc. 

2.  Debt fund- Debt is a term used to depict the money borrowed by one party from another. The investments made in debt securities namely treasury bills, Government Securities, and Debentures are known as Debt funds.

Some examples/types of debt funds include Gilt funds, corporate bonds fund (on the basis of the issuer); liquid schemes, short-term debt schemes (on the basis of tenor); diversified debt funds, Junk bond schemes (on the basis of investment strategy), Overnight fund, Low Duration fund, etc.

3. Hybrid funds- Hybrid funds are basically those funds that invest in a combination of various asset classes such as stocks, cash, debit, and bond. They are often known as Balanced Funds.

Some examples/types of the same include- Debt oriented Hybrid Funds, Monthly Income plans, Capital Protected Schemes, etc. 

4) Solution-oriented Fund Schemes- The investment options which cater to the need of an investor in terms of specific goals are known as Solution-oriented fund schemes.

Here, the specific goal can be aimed at retirement planning, higher education of children, etc. Some examples/ types of the same include Retirement fund, Children’s fund, etc.  

OTHER SCHEMES-  

1. Index Funds- Often called exchange-traded funds are funds that tend to follow pre-set rules in order to keep a track of a specified pool of underlying investments.  

2. Fund of funds- Also known as an overseas or domestic fund, is basically a basket of funds that invest in other funds.  

3. Real Estate Fund Schemes/ Real Estate Investment Trusts-

●      Real Estate Mutual Fund- invests directly in assets of real estate, according to the rules and regulations specified by SEBI.

●      Real Estate Investment Trusts (REIT)- invests in assets of commercial real estate. These are mainly trusts that are legally registered with SEBI.

●      Infrastructure Investment Trusts (InvIT)- are trusts which are registered with SEBI and are known to invest in the infrastructure sector. 

Want good returns? Learn about ELSS

 As working individuals, it is amicable if you think about savings, as this entity usually proves helpful in times of need or for future needs as well. According to some experts among the tax-saving options available equity-linked savings schemes or ELSS is that type of mutual fund which tends to offer an outstanding combination of a good return, short lock-in period as well as highly flexible scheme. 

As a matter of fact, this type of mutual fund forms the top choice for investors. 

What is ELSS? 

The mutual fund scheme that is diversified in nature and enables dual tax saving, due to the growth potential of equities, is termed as ELSS. This mutual fund scheme basically invests in stocks, but it differs from other tax-saving options in the sense that a shorter lock-in period of 3 years is associated with it. 

If you are a first-time investor then equity-linked saving is an excellent option to opt for because it provided two major benefits namely, tax saving and wealth creation. 

Point to remember- If you decide to invest in ELSS, then you must have knowledge about a very important mandate associated with it. As per Section 80C of the Income Tax Act, if you make an investment up to ₹1.5 lakh per annum in ELSS, then you are eligible for income deduction. 

This further implies that you can subtract the amount you decide to invest in ELSS from your all-over income, so as to reduce your taxable income. This ultimately leads to a reduction in the tax amount you need to pay. 

Example- Let us elaborate on the concept of ELSS with a real-life example. Consider a person named Ankita who works as a chartered accountant in a reputed firm and earns a taxable income of ₹18 lakh per annum. This puts her into Tax bracket of 30%. Further, she decides to invest ₹1.5 lakh in the ELSS fund. 

Now, as per Section 80C of the Income Tax Act, she is left with a taxable income of ₹16.5 lakh and on the other, she will also be saving the money she decided to invest in the ELSS fund.

Advantages of investing in ELSS fund-

• It offers a shorter lock-in period of 3 years.
• It is a perfect tool for wealth creation because it invests in inequities.
• There is no upper limit as to how much you can invest in this fund.
• Provides better-tax returns.
• Investing in ELSS comes with no complications and is very simple. 

How to Invest in Direct Mutual Funds?

Introduced in the year 2013 by the SEBI, Direct Mutual funds have gained popularity since then. Thus, if you have decided to invest in a direct mutual fund then it is indeed a great idea!

One of the most beneficial factors about the direct fund is that it ensures that the amount which you have to pay to the middlemen is saved. And, you can use that money in other productive work. Direct mutual funds involved no middlemen thus no commission as well.

Let us now address the elephant in the room, how to invest in a direct mutual fund. The process to invest in a direct mutual fund-

There are two modes to invest in a direct mutual fund investment, the Online and Offline mode. Now, once you have decided that you want to invest in the direct mutual fund the next step is to select the mutual fund in which you want to invest in and it also suits your investment needs at the same time.

It is very important to remember that the amount you want to invest in the scheme is based on your investment goals. You can either choose to go with SIP or lump sum deposits as well.

The Offline Mode-

Several investors feel comfortable going with the traditional route and investing in direct mutual funds through offline mode. The steps involved in the same are mentioned as follows-

 

1)    The very first step is to visit your nearest AMC office whose fund you have selected to invest in. Or, you can also choose to go to the local offices of RTAs like Cams and Karvy as they have mostly all the mutual fund houses registered with them.

2)    Once you are at the AMC or local office offices of RTAs or Karvy, you need to complete your KYC process if you are not compliant with the same.

3)    The document required for the KYC process is available at the AMC branch itself. Along with this, you have to carry a few documents namely, a self-attested copy of PAN, a self-attested copy of address proof, common application form (in case you take the route of SIP for investing directly).

4)    Once you submit all the required documents you need to give a cheque or demand draft in the name of the AMC after mentioning the amount you wish to invest.

5)    You will be allotted an account statement once the entire process is done.

Online mode-

A more convenient method is with the online mode where there is no hassle of visiting the AMC physically. The steps involved under this mode is as follows-

 

1)    At first, you need to take care of the KYC formalities here as well. The best thing is that it is a one-time process and it can be used across all platforms to invest in Direct Mutual Fund Plans.

2)    Now, if you decide to invest in the direct mutual fund via the asset management company website then you need to start with setting up an account with that AMC.

3)    Then you need to select the scheme available under the ‘direct’ plan type. After this, select the investment details like- SIP or Lump sum, demat or no demat, mode of payment, bank name, bank account number, IFSC, account type, and finally click the confirm tab.

4)    The next step is verification. For this, some AMCs need you to validate the submission form by an OTP.

5)    Do the payment and you are done.

 

Investing in the direct mutual fund is one of the most economically beneficial methods, to begin with. It is mainly due to the reason that it eliminates the additional costs often involved in mutual fund investment. So, compare the pros and cons of regular as well as direct investment plans and then accordingly make up your mind.