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How to use MFs for goal-based investment?

An investment of Rs 5,000 on Sensex at the start of 1980 would have become Rs 1,000,000 today

VEN though the middle E class is proliferating ex ponentially in India, their investment behaviour hasn't really seen any paradigm shift.


Fundamental economics suggests that the needs of a person ascends with age and social mobility. In the process, all anticipated needs have to be catered to as per priorities, along with other regular and contingent requirements such as healthcare and education.

In certain circumstances, income inflows remain periodic and fixed. Additionally, most household savings generally get locked in low-return asset classes. In such a scenario, mutual funds can play a significant role.


They cannot only outperform, but can cater to specific goalbased needs as well.

Return potential is one of the main cornerstones of mutual fund investment. It allows you to invest in equities by proxy (apart from many other avenues). Historically, investment in a Sensex portfolio for 30 years would have provided an annualised return of nearly 18.75 per cent, though this does not indicate future performance in any manner.

This translates into a simple hypothesis that an investment of Rs 5,000 at the start of 1980 in Sensex would have become Rs 1,000,000 on October 30, 2010.

For those participating in this growth through the mutual fund route, the added advantages are professional management and service orientation that these products offer.

The mutual fund route can be utilised to take care of many needs, such as planning for your child's future, education, healthcare, tax planning, capital protection, monthly income inflow and retirement planning, to name a few. These objectives can be achieved through judicious investment allocation to various mutual fund product offerings.

The central element in deter mining the investment allocation mix depends on the investment objective and risk-return profile of an investor. For example, an investment in a thematic equities fund may not be a prudent option for a 65-year-old pensioner; while a pre-dominant and long-term allocation into a short duration bond scheme by a 25year-old bachelor may carry a high opportunity cost. What is pertinent to note here is the investment horizon of the investor.

Investment objective, risk-return appetite and investment horizon are different for different people. Therefore, it's difficult to make an overarching recommendation without the necessary due diligence.

Assuming that an investor is able to ascertain her investment objectives and risk-return profile, she can easily narrow down on investible products that match her requirements. After that, investors can prune her list of selected products further by ranking them on various performance criteria such as sharpe ratio and alpha to better ascertain the quality and nature of performance provided by a fund house.


Issues like cost of investment and nature of liquidity, too, are factors one should look at while choosing the scheme.

Mutual funds offer diverse products to suit varying requirements. Once you have managed to identify your needs, identifying the right product becomes pretty easy.

 

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