What Are the Types of Financial Goals I Can Fulfil with Mutual Funds?

Mutual funds make the financial markets more accessible to investors and can offer superior return potential compared to traditional savings avenues over long term. This makes mutual funds a suitable way for investors to work towards their financial goals.

There are three aspects to a financial goal: How much money is required, when it is needed and what it is required for. Common examples include saving for emergencies, buying a home and building a retirement corpus. With regard to investment horizon, financial goals can broadly be classified as short-term, medium-term and long-term.

The wide spectrum of mutual fund categories in India makes these investment vehicles suitable for a wide range of financial goals. This article tells you more about goal-planning with mutual funds.

• Table of contents

1. Short-term goals
2. Medium-term goals
3. Long-term goals
4. Risk tolerance

Short-term Goals:

Short-term goals typically focus on events or requirements that are less than a year away or events coming up in the near future. This could include saving for a vacation or building an emergency reserve.

For short-term goals, relative stability of capital and liquidity are important. Debt mutual funds can be a suitable avenue for such goals. These funds invest in debt securities such as bonds and treasury bills, offering better return potential than traditional savings avenues such as bank deposits. They also entail lower risk than equity because earnings depend on interest payments and principal repayment from the issuer where the investment is undertaken.

In particular, debt funds with a very low portfolio duration such as liquid funds, overnight funds and short-duration funds may be suitable avenues for short-term savings. These funds typically carry low/low-to-moderate risk. They are also highly liquid, with quick redemption options. 

Medium-term Goals:

A medium-term goal could include buying a car, financing a child’s higher education or renovating a house. Such goals could have an investment horizon of up to five years.  

Mutual funds that seek to balance reward potential with risk management could be a suitable option for such goals. Very conservative investors could consider debt funds that invest in securities with a medium-to-long duration. Investors that are comfortable with some risk in exchange for better return potential could consider hybrid funds that combine stocks and bonds in their portfolio.  

Long-term Goals:

Long-term goals could include building a retirement corpus, buying a home or wealth-building. These goals typically have an investment horizon of seven years or more.

who are comfortable with risk in exchange for optimised return potential may consider equity mutual funds. These funds mainly invest in stocks and have the potential for capital appreciation over the long term. They can be a suitable way to build wealth over a long investment horizon. An extended investment tenure can potentially help equity investments tide over short-term volatilities. Moreover, equity markets offer superior wealth potential when compared to bank deposits or debt securities over long term. For those focused on retirement, using a retirement pension plan calculator can be a valuable tool to determine how much to invest each month to achieve their savings goals. This resource can streamline financial planning by offering quick estimates on the necessary investments based on individual objectives and current savings.

Risk Tolerance

Apart from the investment horizon, it’s also important to take your risk tolerance into account when choosing the right mutual fund scheme for your goal.

For instance, equity is typically suited for long-term goals because it offers wealth-building potential over time. However, risk-averse investors may not be comfortable with equity funds, even for long-term goals, because of the high risk they carry. Such investors may consider a balanced hybrid fund, which allocate 40% to 60% each to debt and equity.  Investors who want even lower risk could consider a conservative hybrid fund, which has an equity component of 10% to 25% and a debt component of 75% to 90%.  

Even among investors who are comfortable with equity investments, very high risk investors may prefer small cap stocks whereas those seeking more risk mitigation measures may prefer large-cap portfolios.  

Financial goals are objectives set by investors to achieve specific results within a certain period. Financial goals can be short-term, medium-term goals or long-term. Diversification and professional management make mutual funds suitable investment avenues for several such goals. However, the right mutual fund category will depend on investment horizon, risk tolerance and liquidity needs, among other factors. 

FAQs

Are there different funds for short-term vs. long-term goals?

Debt funds are typically better suited for short-term goals because they are relatively stable. Equity funds are usually recommended for medium or long investment horizons of five-to-seven years or more. This is because equity can be volatile in the short term.

Can I use the same fund for multiple investment goals?

Within the same investment horizon, a single mutual fund can be suitable for multiple goals. You can choose your investment amount and mode (lumpsum vs SIP) depending on the total amount you need to meet these multiple goals. However, you may consider diversifying across more than one mutual fund scheme for enhanced risk-mitigation.

If the time horizons for the goals are vastly different (short term vs long term), it may be better to use different mutual fund types.

Are there funds specifically designed for retirement savings?
Several mutual fund houses offer retirement funds. Moreover, hybrid funds or some equity funds may be suitable for retirement planning. Post retirement, debt mutual funds that offer relative stability and the potential for a regular income stream may be a suitable option.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.