Mutual fund investments should always be based on the goal. You should manage your goals separately like you want to invest for your child’s marriage, education your retirement etc. This is what everyone tells you. Well to be frank I always hate this goal based section.
Suppose you had planned 25lakhs for your child’s marriage and you have achieved that goal a year ahead. Now, do you stop investing in that goal? What will you do if you have an excess expense of 1 lakh during the marriage? Do you withdraw from your retirement goal or do you reduce expenses? What if there is an extra 1 lakh left after marriage? Do you transfer money to a different goal or to your bank account? What if 20 years later there is another corona and your child had to get married without any guests in a private ceremony.
Another example you planned 50lakhs for your kid’s education in some European country and you find that after 20 years colleges in your neighbourhood are better than in Europe. Or the entire education system has now changed and everything is online and there is not much increase in expenses because of this fact. Or the countries have scrapped the VISA for education or the foreign universities have now branches in India.
What if the marriage goal is achieved faster than the education goal? What if you have extra 5000/- this month post all expenses? Do you spend that money or just keep it idle in the bank account. Or you transfer that amount to any one of the goals.
I find all this really confusing and I advise everyone to create just two goals. One is the emergency fund goal and other is the wealth goal.
Emergency fund goal: This should preferably be of an amount equal to your 6 months of salary parked in liquid instruments. It should be able to help you meet any of your emergency needs.
Wealth goal: This is like the God fund or the world bank where you invest for all your needs including your vacation, retirement, kids education etc. You should be transferring money to this goal every month. This will have all sorts of fund combination for your short term and long term needs. However, there is no distinction for goals.
Suppose you have an expensive goal coming up in the next 5 years, you should try to meet your goal with a combination of salary + redemption. At least 5years before goal start an STP to switch some of your funds to a conservative hybrid kind of fund and your regular SIPs to a liquid fund. Once you reach the target amount you can resume your SIPs. You may take some cautious decisions also here. If the market is down currently maybe you can wait for a year or two. This is why I asked you to give a timespan of 5years. Also, you should have sufficient debt holdings for such situations.
The one main thing to consider every time you make a withdrawal is to be more logical. Suppose you are just 5 years from your retirement and your total savings in wealth goal is 1Crore, and also you have your daughters wedding next year. You should not spend like 50 lakhs as wealth goal doesn’t have enough for your retirement. Having a single goal also means you should have a larger picture of all your future expenses.
This is what I have been following for some time now and has been working great for me. I have also been following the same approach with my clients. It will work for 90% of the cases where you have around 10-15 years for your first goal. Well if your first goal is just 4-5years then you should always choose more conservatives instruments.