Imagine going on a road trip to an uncharted territory and the first thing that strikes the mind is setting up the map. Thanks to modern technology, all it takes is specifying the next destination and the navigation system effortlessly steers you along the most optimal route. In a similar vein, financial planning begins by assessing your current financial situation and the destination i.e. your financial aspirations.
It's like setting the coordinates for your financial journey. Whether it's buying a home, funding your child's education, ensuring a comfortable retirement, or pursuing any other life aspirations, financial planning creates a detailed blueprint for achieving them. In simple words, it is a strategic approach that guides you on your journey to achieving various life goals.
While this approach may sound straightforward, it comes with a multitude of real-world challenges. It is crucial to understand that financial goals fall into three main categories; Short-term goal such as buying a car, medium term goal such as international family vacation and long term goal such as building a corpus for retirement. Investors commonly intertwine these goals, which can lead to a lack of separate planning for respective goals.
The second key concern revolves around insufficient understanding of Mutual Funds and their potential in successfully executing a financial plan. Mutual funds are collective investment vehicles that pool money from different investors and invest in various asset classes such as equities, debt, commodities etc. It is vital to recognize that mutual funds offer a comprehensive solution for all your financial planning requirements. Let us now understand how Mutual Funds and its tools can unlock your financial success.
The very first step of planning is goal setting followed by aligning investments to each of the goals decided. Mutual Funds offer baskets of investment products each tailored to different risk levels and goals. For instance, Debt or Arbitrage funds are typically lower-risk options suitable for short-term investment goals.
On the other hand, for medium to long-term goals, equity or hybrid funds have proven to be the appropriate choice. Mutual Funds also make it easy to adjust the investments based on life stage. Depending on your age, investment duration and risk tolerance, you can define the asset mix with appropriate Mutual Funds, thereby creating a well-diversified portfolio.
The second aspect of financial planning addressed by Mutual Funds is affordability. The concept of ‘small investments becoming big in the long term’ is a fundamental principle of investing and wealth building. With mutual funds offering various options of Systematic Investment Plans (SIPs), Top-ups and Systematic Transfer Plans (STPs), one can keep on adding modest investment amounts which over the long term not just aids in wealth creation but also mitigates market volatility risks.
Further, Mutual Funds play a pivotal role not only in wealth accumulation and preservation, but also in wealth distribution. Through Systematic Withdrawal Plan (SWP), investors can receive regular cash flow serving as an additional source of income when required. In case of an emergency, the best part about Mutual Fund investments is that they can be liquidated, providing access to the invested capital instantly. Moreover, one can subsequently recommence the investment once the stability is restored.
Even when it comes to taxation, Mutual Funds emerge as one of the most tax-efficient investment products. For instance, in equity-oriented funds, one pays a 10% tax on the profits exceeding Rs. 1 lakh in a financial year, while Short-Term Gains are taxed at 15% if the investment horizon is less than 12 months. On the other hand, tax on Debt-oriented funds is based on an individual's income tax bracket.
It is imperative to bear in mind that financial planning is an ongoing journey rather than a fixed destination. As time progresses, investors should reassess their portfolio in line with the remaining investment duration and evolving needs. With Mutual Funds, you can easily track and adjust your portfolio online to accommodate the changing requirements, providing a highly flexible approach that sets them apart from other investment options. In summary, the convenience, transparency, diverse product offerings, cost-effectiveness, and digital tools like STP and SIP calculators have made investing and financial planning easier and more accessible with Mutual Funds.
Author's note:
Shailly Seth is Founder and CEO of 12 months.in. The views mentioned above are personal and do not represent that of CNBC-TV18 or its management. This is a partnered post.
Disclaimer: Mutual Fund investmentsare subject to market risks. Please approach your financial planner before taken any investment decision.
(Edited by : Jerome Anthony)
