How to use mutual funds for financial planning?

In life, it is always good to have a plan. This is especially true when it comes to managing your money and ensuring that you are on track to achieving your goals. Which is why most people will tell you that the moment you start your earnings and investment journey, you should start your financial planning journey. Which brings us to the first question which is probably on your mind.

What is financial planning?

You might have plans to go on a vacation next year or buy a car in the next 3 years and maybe even buy a house in the next 7 years. At the same time, you know that planning alone will not get you there, what you need is the right amount of money. And that is exactly what financial planning can help you with. A financial plan is simply a tool that gives you control over your savings and investments, and guides you on your journey to achieving your multiple goals. It helps you make the right decisions in terms of where to invest, when to invest, and how much to invest.

How financial planning works

The most important thing about financial planning is that you must start as soon as you begin your earnings journey. The next step is of course, to create a financial plan. Here, you can either adopt a DIY approach or you can consult a financial advisor. The latter would always be better. Below, we share with you the basics of how financial planning works:

• Set SMART goals:These are goals that are specific, measurable, achievable, realistic, and timely. For example, a generic goal would be to buy a car. A SMART goal would be to buy a sedan costing around INR 15 lakh, 3 years from now. SMART goals will help you understand how much money you will need to accomplish your goal and can thus guide you in your financial planning.
• Determine your risk profile:As you already know, different investments offer varying levels of returns and risk. Traditionally, equities are considered high risk and high return investments while debt is considered a low risk and low return investment. At the end of the day, everyone will want high returns, but not everyone is capable of taking the same amount of risk. Which is why it is important for you to assess both your willingness and ability to take risk. This will help you decide the amount of risk exposure your overall portfolio can take.
• Investment time period:In your financial planning journey, knowing when you want to achieve which goal is as important as understanding risk and return. There are two reasons for this. One, the timeline acts as a deadline and ensures that you stick to your financial plan. And two, it also determines the amount of risk that you can take. For example, equities are considered long-term vehicles of wealth creation. In the short-term, they can witness significant price swings. So, if there is a particular financial goal that you would like to achieve in 1-3 years, then equities might not be the right instrument for you even if your overall risk profile is high.

How mutual funds can help you in financial planning

The most basic element of financial planning is to create a diversified investment portfolio that can give you the return that you desire while ensuring that you take risk only as per your risk profile. In such a scenario, mutual funds can be a great investment option. As you probably already know, mutual funds are investment vehicles that pool investor money and then invest that money across multiple investment instruments and strategies. They invest in low-risk debt instruments, high-risk and potentially high return equites, or even have hybrid portfolios that invest in both. Further, there are short-term funds, medium-term funds, and even long-term funds. Due to all these factors, mutual funds can potentially meet many of your investment needs and become an integral part of your financial planning journey.

Overall, one thing that you must remember is that financial planning is a journey and not a destination. This means that you must create a financial plan and stick to it through the ups and downs of the market. If done right, then financial planning can be the map that takes you to your multiple goals.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a onetime KYC process. Investor should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY