Guide To Reach Your Financial Goals

3.1 Three Common Investment Goals

Mutual funds can help you achieve various financial goals. There are three common investment goals:

Goal Number 1- Retirement

Most individuals buy mutual funds for long-term goals, especially retirement. It is estimated that retirees will need 70 to 80 percent of their final, pre-tax income to maintain a comfortable lifestyle in retirement. If you plan to retire at age 65, retirement savings should last for at least 17 years, since the average life expectancy for a 65-year-old is 82, and continues to rise. Ideally, individuals use a combination of sources to fund retirement, such as Provident Fund, Retirement Savings scheme, personal savings like Fixed Deposit & Gold.

Goal No. 2: Education

Many parents and grandparents use mutual funds to invest for children’s college educations. Your time horizon is an essential consideration when investing for education: if you start when the child is born, you have 18 years to invest. However, if a child or grandchild is in your future, the time horizon can be lengthened by investing now.

Goal No. 3: Emergency Reserves and Other Short-term Goals

Emergency reserves are assets you may need unexpectedly on short notice. Many investors use money market funds for their reserves. Money market funds alone, or in combination with short-term bond funds, can also be appropriate investments for other short-term goals.

3.2 Funds For Each Type of Goals

For each goal, lets understand what kinds of funds are best suited to it.

Investing for Retirement–
The mistake that people at all income levels make with retirement accounts is not taking advantage of them and delaying the age at which they start to sock money away. The sooner you start to save, the less painful it is each year, because your contributions have more years to compound. Each decade you delay approximately doubles the percentage of your earnings that you should save to meet your goals. For example, if saving 5 percent per year starting in your early 20s would get you to your retirement goal, waiting until your 30s may mean socking away 10 percent; waiting until your 40s, 20 percent; beyond that, the numbers get troubling.

Taking advantage of saving and investing in tax-deductible schemes should be your number-one financial priority (unless you’re still paying off high-interest consumer debt on credit cards or an auto loan). Here one should invest in Employee Provided Fund, endowment plans and pension plans.

Investing for Education
To keep up with or stay ahead of college price increases (which are rising faster than overall inflation), you must invest for growth. At the same time, you have to keep an eye on your time horizon; kids grow up fast. The younger your child is, the more years you have before you need to tap the money and, therefore, the greater the risk. A simple rule: Take a number between 30 (if you’re aggressive) and 50 (if you’re more conservative) and add that to your child’s age. Got that number? That’s the percentage you should put in bonds; the rest should go into stocks. Be sure to continually adjust the mix as your child gets older. Thus investing in Equity funds are best options when looking at savings for child education.

Emergency Reserve– Before you save money toward anything, accumulate an amount of money equal to about three to six months of your household’s living expenses. This fund isn’t for keeping up on the latest consumer technology gadgets. It’s for emergency purposes: for your living expenses when you’re between jobs, for unexpected medical bills, for a last-minute plane ticket to visit an ailing relative. Basically, it’s a fund to cushion your fall when life unexpectedly trips you up.

How much you save in this fund and how quickly you build it up depends on the stability of your income and the depth of your family support. If your job is steady and your folks are still there for you, then you can keep the size of this fund on the smaller side. On the other hand, if your income is erratic and you have no ties to benevolent family members, you may want to consider building up this fund to a year’s worth of expenses. The ideal savings vehicle for your emergency reserve fund is a money market fund.