Achieving Financial Goals & Choosing Portfolios

While setting up a financial goal, always consider the example of a homemaker as they’re known to run households and yet in the month end, generate surplus. The way they manage this, is worth considering as they create separate cost heads and earmark funds for each of them. In the same way, when you plan for achieving financial goal, create separate portfolios for each of your goal.

Why You Need Separate Portfolio

Goals are varying and need to be achieved within the set time-frame. For e.g. someone in his/her late 20s could be planning to buy a house while kids education many be 15-20 years. Similarly, retirement could be planned after 30 years. In such cases i.e. when the time-frames for two goals aren’t the same, the assets that one requires to invest in to achieve those goals differ too.

Starting Your Financial Journey

Creating Emergency Fund: Unforeseen events cannot be neglected and therefore it is necessary to secure your financial future. But before you embark your financial journey, create an emergency fund that can help you meet 4-6 months expenses. Best recommended solution is Bank FD’s and liquid mutual funds.

Buying House: Never invest in equity directly, if buying a new house is your goal. Although equity outperforms all other asset classes over the long term, given its volatile nature, direct investment should be avoided. Instead, choose at least two balanced funds and start investing in them through Systematic
Investment Plans (SIPs) under the growth option.

If your goal is at least five years away, invest in equity linked savings schemes (ELSS). For periods significantly shorter than five years, say three years, you can look investing in Debt Mutual funds.

Kids Education: Have separate portfolios (for higher education, too) for every child.

• Kid turns 1 year old: Ideally, before the kid is 1 year old, you can consider investing in diversified equity mutual funds (mostly large-cap), gold exchange-traded funds (ETFs) and large-cap stocks, among others. 
• Kid reaches age of four: Diversify the portfolio further. Invest in a mix of large-, mid- and small-cap stocks that have performed consistently.
• Crosses 5 or 6 years: Buy gold ETFs (up to 5% of the portfolio) and buy large-cap stocks.

Continue with the same strategies when age difference between two kids isn’t much.

Retirement: One of best way to enjoy stress-free retirement is investing in high return options. Lay foundation with SIPs in 2-3 good diversified equity mutual funds. Over time, buy index funds and ETFs and as your income increases, some large-cap focussed funds. When you’re a few years away from retirement, add some mid-caps funds for a kicker to returns. However, for those nearing retirement or starting very late, it makes sense to go a little less aggressive on equities. And, all along, do periodic reviews to take corrective action.

Derisking: While equities helps in creating a corpus, debt helps in preserving it. Ideally, when three years away from reahcing your gaol, start the derisking process. Start shifting funds from equity to debt. For instance, from equity funds, move money into debt funds through SIPs.

Risk Coverage: Throughtout your financial journey, it’s important to cover the risk. For example, a premature death can derail most financial goals of an individual. Get a pure term insurance plan so that even in case of a setback all future goals are achieved.