How do Mutual Funds help in financial planning?

We are aware that investments are highly important in today's growing economy. Everyone wishes to grow their funds for a secure future. However, only a few have specific goals for the same. Hence, most of them invest aimlessly. The primary approach is parking surplus finance under Fixed Deposits, saving schemes, Stocks, Bonds, etc. Of late, Mutual Funds have gained immense popularity.

They are touted as an investment product in all major financial institutions. Also, appealing returns are gaining further attention. However, most people invest in Mutual Funds without proper planning. This affects their returns and ability to diversify their portfolio. For controlling investments, align them with your financial goals. Here is how to do so:

Identify objectives

You require a plan to grow your wealth optimally as this lets you select suitable schemes. Hence, draw out a proper plan for each investment with a specific goal. You can ensure this by giving your goals a monetary value. For instance, most people aspire to a dream vacation, buy a house, invest in a child's education, plan retirement, etc. These become realistic when you calculate your financial requirements.

Categories

After identifying your objectives, it is easier to estimate the funds required. This lets you classify your goals as short-term, medium-term, and long-term. A vacation is a short-term goal compared to buying a house. Apply this logic in categorising the funds for each objective. Now, short-term schemes are between two to three years, medium-term ranges from three to eight years, and long-term are up to 10 years or above.

The longer the duration, the better the returns. However, you need to remain invested for the entire period. Hence, carefully analyse your needs and budget before investing.

Asset allocation

When investing in Mutual Funds, you can diversify your securities. Here, you can opt for the asset mix that suits your risk appetite and objectives. You can select between Debt, Equity or Hybrid Funds. Ideally, you should opt for multiple asset classes for diversification. This spreads the risk across various schemes and ensures minimal earnings regardless of the market condition.

Choose the right funds

Asset Management Companies appoint a fund manager to help you with investment decisions. They also offer multiple Mutual Funds to select the scheme that suits your needs. While selecting, evaluate the risk-return ratio. This enables you to choose a suitable asset class. Use them to diversify and create a customised portfolio based on objectives.

If you have a long-term goal, focus on wealth maximisation than risks as market trends do not last long. Do the opposite with short-term goals for quick returns by selling when the market is booming. You could also consider National Pension Scheme if secure retirement is your goal. Use the NPS calculator and check the pension you would receive.