For most of us, the three primary milestones in life are arranging a down payment for the home loan, creating a corpus for kids’ needs such as education and marriage and lastly, accumulating funds for one’s own retirement. Proper assessment of each of these goals after they are identified, estimated for their inflation-adjusted worth and then finding the right asset mix based on one’s risk profile marks the steps towards achieving them with ease. Meeting these goals requires a judicious mix of various asset classes but the reliance on equities should be at the forefront, especially when the goal is at least seven years away. As a retail investor, it’s better to stick to equity mutual funds to realise the true potential of equities. Several studies have shown that equity has the potential to generate high inflation-adjusted returns over the long term, among all asset classes. Debt, as an asset class, has its own role to play in helping achieve the goals. Volatility in debt is less, therefore invest in debt mutual funds to meet goals that are between one and three years away or during the de-risking process when a goal nears. For goals that are around five years, balanced funds that have a mix of equity and debt assets come handy. Ideally, to save for any goal make use of the systematic investment planning approach as it helps to keep costs lower and instills discipline in savings. Now, let us see how each of the above goals can be met through mutual funds.

Owning a home

Owning a home requires a sizeable amount of funds and nearly 20% of the cost of a home is to be arranged as down payment for a home loan. The more the better as it keeps the interest burden in check. If the time horizon is less than three years, the reason to take more risk may not be there as equities need longer time-frame to perform. So, it is better to save through debt funds. When time horizon is close to five years, balanced funds suit this situation. Balanced or hybrid funds, as the name suggests, allocate assets in their portfolio to both equity and debt, most of them with a bias towards equities. As the goal nears, start shifting to less volatile debt funds. In case there is a gap in funding, opt for loans against existing assets like bank fixed deposits. If shortfall still persists, liquidate investments especially those generating lower than inflation returns and not nearing its maturity.

Meeting needs of children

When it comes to taking the mutual fund route to plan for your kid’s future, get a fix on your target amount and then work backward to ascertain how much money you need to put aside every month. If your child needs the funds anytime more than seven years from now, opt for equity funds. Stick to large-cap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. Mid-cap funds can be considered to get the kicker in returns. The idea is to take the equity advantage and yet control the risks you take. Opt for consistently performing equity schemes with an established track record. Put any windfalls like bonuses, arrears into existing investments. Nearing goal, ensure you gradually shift funds towards debt funds to preserve the accumulated corpus. One can also make use of systematic withdrawal plan (SWP) to shift funds from equity to debt funds on regular intervals.

Retirement years

Once you start accumulating your retirement funds, you want your money to work harder for you. Invest in instruments where the compounding takes place more frequently. Re-adjust your risk profile gradually to increase returns. Asset allocation depends largely on the level of risk you are comfortable with. When you are young, with more disposable income and fewer liabilities, you are more likely to take risks. Invest around 75% in equities if you are an aggressive investor, if you are the conservative type, a 65% allocation is a good idea. If you are in your thirties, lighten up on your equity funds holding marginally, the aggressive investor from 75% to 65%, and the conservative investor from 65% to 40%. In the forties and beyond, stick to the asset mix going along. The right mix of assets goes a long way in determining how much you end up having at the end of the goal.

Source:Financial Express

The Sensex and Nifty, India’s benchmark indices, have risen by 20% since the beginning of the year which is the highest in the world. So if Indian markets are galloping, then what should you, as an investor, do? The answer is that you should ignore market levels and remain invested till the time your financial goals are achieved. Let the market attain a new high every day, it doesn’t matter!

Why are markets growing?

India’s macroeconomic indicators are supporting high growth. Gross domestic product (GDP) growth was 7.1% for FY 2016-17, inflation is falling and the fiscal deficit is in check. Indian economy is the fastest growing economy in the world. In 2016-17, the government had achieved the fiscal deficit target of 3.5% and in 2017-18, the government aims to further bring it down to 3.2%. Retail inflation has fallen to 1.54% in June this year. The implementation of goods and services tax (GST) will add value to the reforms process and is likely to push GDP growth higher. Indeed, the Indian economy and the markets have no reason to worry in the near term at least. Investors across the globe are confident of India’s growth movement and it is reflecting in the stock markets indices’ growth. Though markets have attained new highs many times in the recent past and continue to move to record-high levels, no one can predict the next move of the markets. It may attain a new high or may enter into a correction mode.

Knowledge and confidence

As a long-term investor, you should neither worry about day to day market levels nor feel euphoric at an all-time high index. The most important point should be to remain invested in the markets until the time your financial goal is not reached. As an investor, you must have knowledge and confidence. The basic knowledge of the functioning of the markets, information about investment opportunities, asset allocation will give you the confidence to stay calm in volatile markets.

Ignore market noise, continue with SIP

Systematic Investment Plan (SIP) is a long-term investment option and returns are adjustable with long-term market movement. It is not advisable for investors who have short-term financial goals. You need to remain invested in SIP for a reasonably long term, say, three years and above. The biggest advantage of SIP is that you can start it at any time with whatever amount you choose. Once you start with a SIP, then you should not worry about market levels—high or low. You should continue with your SIP till the time your financial goals are not achieved. You can review the performance of a SIP once in six months or any time when markets are attaining all-time highs or low levels. However, discontinuing SIPs in between is not an advisable option at all. The yardstick for SIP must be your financial goal—if achieved, then obviously SIP becomes successful otherwise you need to remain invested till the time you have attained your financial goals, despite market levels. Remember that SIP should link with your financial goals and the performance of SIP should not be judged on the basis of day-to-day market levels. Market levels will keep changing but your financial goals are fixed. Let your SIP achieve it. You need patience and confidence till the time your SIP is successful. The volatility in the markets may extend the period of celebration but ultimately long-term investment in markets via SIP has the potential to deliver healthy returns.

Source: Financial Express

In October 2017, Securities & Exchange Board of India (Sebi) issued new reforms on the categorization of mutual fund schemes and narrowed down on just five main categories (equity, debt, hybrid, solution-oriented and other schemes) to curb the unnecessary cluster within fund houses. This is a big shakeup for the industry in which they have to categorize their existing schemes according to the new categorization, appeal to Sebi (if required) and painstakingly e-mail investors about the same. This will surely help investors who are confused with the multiple schemes and probably help put a leash on mis-selling as schemes will have common parameters through means of categorization.

Close-ended schemes

With the start of the new year, there will be many “me too” funds launched. The Sebi order applies only to open-ended schemes which means that there is a high chance of multiple schemes in the close-ended category springing up in the new year. Close-ended schemes have a lock-in of usually three or five years where investors who bought during the new fund offer, can redeem only once the product matures or on the stock exchange where they are listed. A fair bit of mis-selling may happen if the commissions are high. Investors who buy close-ended schemes may realize that liquidity is poor in case they need to go for redemption in a hurry. If an investor needs more money, his only option is to sell on the stock exchange which can be at a discount to the NAV (as is as present). From a retail participation point of view, with the decline in interest rates, both in terms of savings account rate of interest and as the fixed deposit rate of interest, investors have little choice but to reallocate their wealth to other asset classes such as equity to improve their returns over the long term. That is also one of the reasons why the MF industry is looking forward to getting a nod from the government for pension funds. I believe, investments in equity market through mutual funds over a long period as suited for a pension plan (depending on the age profile of the investor), could allow investors to make the most of the rising market.

Retail participation

Retail participation will continue to improve in the Indian markets. Ideally speaking, investors need better awareness with regards to inflation and how much it eats into their chunk of savings. With most of their savings stashed away in popular asset classes such as gold and real estate, investors’ are slowly turning towards mutual funds as we see a huge number of folios and domestic retail inflows into financial markets. A clear shift has been noticed in the savings patterns of Indians, as the following data suggest, over the past few months. According to AMFI, total inflows into mutual funds across equity, balanced and equity ELSS categories from January to November 2017 was `1,77,223 crore. Close to 50% of these inflows have been parked in debt to balanced funds, and the rest went into equity-oriented schemes. Asset allocation may become popular in the near future. Everyone has dreams and desires but not all plan their investments according to their goals. Most people just invest in an unplanned manner. Goal-based investing adds direction to an investment. Having a purpose behind every rupee that you invest is known as goal-based investing. In the coming year, I foresee more of such funds introduced by fund houses. For investors, goal-based investing offers a structured, well thought out process for investing, where they know the purpose behind the hard-earned money that is being invested. Mutual funds may start playing an advisory role to tap these investors looking for goal-based investing.

Source: Financial Express