What happens when you invest in mutual funds with a goal?
The times were gone when there were only a few selected schemes that existed, and you had to choose one of them. Nowadays, mutual fund houses offer different schemes, and you can invest in these funds as per your financial goal.
But what difference do you make when you start investing in a mutual fund by considering a financial goal?
Well, before understanding such a question, let us know what a financial goal is. The financial goal is a financial target to aim for while planning your personal finance. It includes retirement planning, children's education, buying a house, etc. When your aim involves finance, and you have to achieve it by saving or investing, it could be termed a financial goal.
Investing in mutual funds schemes based on your financial goal might be the best option as it can help you diversify your portfolio according to your risk appetite and expected rate of returns. Time horizon plays a vital role in mutual fund investing based on your financial goal, which could be long-term, short-term, or medium-term.
When you have a goal of investing, it will help develop discipline and give you better returns. Let's understand what happens when you invest in mutual funds by taking a goal in your mind:
Developing strict discipline
Investing without having any goal lead you to irregularities in your strategy. The goal motivates you to keep investing in a particular mutual fund scheme through a SIP that helps you develop financial discipline. Financial discipline ultimately leads you to create wealth over a long period.
Start early and get rewarded.
An inherent advantage of investing in the market is you will get compounding benefits. For instance, two people begin investing at two different ages, say twenty and thirty. If someone started investing when they were twenty, their portfolio value would be far higher than if they had started ten years later.
No investing mistakes
Many investors frequently exhibit greed in up-trending markets and anxiety in down-trending markets. Due to this practice, investors purchase dangerous products at exorbitant prices and then sell them at a loss when markets perform poorly. Instead of panicking exits and entering, a disciplined investor takes decisions with a long-term perspective. Markets have consistently increased over the long term. Mutual fund investing helps you keep invested in a particular scheme for a more extended period to offset the losses during the market crash.
Your mutual fund scheme is selected based on your risk profile only. When you have a goal for your mutual fund scheme, you do not change your risk profile and try to stay invested until you achieve such a financial goal. It helps you in offsetting the market crashes, as every market crash recovers when economic conditions improve. In the long term, your mutual fund will benefit you in either way.
Your risk profile is majorly based on your financial goal's time horizon and sensitivity level. Consequently, the diversification of your portfolio depends on your risk profile. You can reduce the risks of holding just a few equities or a single asset class with a diversified portfolio. Diversification makes it possible to accomplish goals without experiencing too much instability. Your mutual fund scheme helps you to keep aligned with your risk profile and diversification, which ultimately helps you in attaining your financial objectives in the expected time.
Having a financial objective to invest in any investment avenue helps you make the right and conscious investment decisions. It can help you attain goals and assist you in getting a passive income or becoming equipment for wealth creation. Random investing in mutual fund schemes could be tiring and lead you to make the wrong investment decision due to a lack of clarity.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.