Once you know your financial goals, and the asset classes you need for them, the next step in achieving these goals is selecting the right instrument. This approach will help you set rational return expectations, and more importantly won’t lead to disappointment.
In this article we will consider the first four type of goals or long term financial goals.
Goals that will take longer than 5-7 years
We have mentioned earlier that any financial goal that takes longer than 5-7 years (that’s because it normally involves a big amount) to achieve is best served by Equity as an asset class.
Considering the ravages of inflation, the returns provided by equity over the long term are generally unmatched by any other asset class even keeping in mind short term volatility and market falls.
Why mutual funds for these goals?
Investing in equity can be done through many ways, but the most popular ones are by either directly buying stocks of companies via brokers or by investing in equity mutual funds. Selecting the right kind of stocks is quite difficult due to the sheer number of companies listed on the stock exchange and selecting the best among them is a full time job. For most investors focusing on stock picking is not worth the effort. There are simply too many variables at play that require professional expertise or at the very least experience and some luck.
Mutual funds are run by professional fund managers whose job and skills are all about selecting the right stocks and managing such portfolios. Their qualifications are top-notch and they are much more likely to do a better job than someone with no knowledge.
Mutual funds are also highly regulated by SEBI and thus offer the most reliable way to invest in equity. For most investors, considering their jobs don’t involve picking stocks for a living, going the mutual fund route is much more convenient, efficient, and effective.
For most long-term goals, large cap equity mutual funds and diversified mutual funds cover most bases. Large cap funds invest in the biggest companies on the index and diversified funds invest across sectors and market capitalisations. The volatility tends to be lowest in such mutual funds allowing marginally higher predictability of returns.