Tag: budgeting

How to set Financial goals

Setting financial goals is essential for personal finance management and budgeting. In order to efficiently manage spending, savings and investments and be financially secure, one must set financial goals.

Being unprepared and spending mindlessly can be quite risky. One should be as prepared as they can be in case of emergencies or financial crises.

Moreover, saving and investing your earnings can help you grow your wealth and utilise your earnings in a profitable manner.

Before setting goals

Financial goals and objectives can vary from person to person depending on their income, investments, expenses, life stage/age, needs etc. Hence, it is important to assess the objective and duration of the goal by following the steps mentioned below-

  1. Identify starting point: Set a date for implementing the plan and its duration
  2. Set priorities: Identify your objectives; Are you saving to invest or to buy or to set up an emergency fund?
  3. Document your spending: Calculate your monthly expenditure. Analyse them and try to reduce them.
  4. Pay down your debt: Reduce your debt and pay it off first to reduce your interest expenses.
  5. Secure financial future: Implement the plan to become financially secure.

Most importantly, financial goals should be S.M.A.R.T – Specific, Measurable, Attainable, Relevant, Time-based.

Specific: Financial goals should be specific in terms of objective, time and amount.

Measurable: Goals should be measurable and expressed in monetary terms. For example, goal to be rich is not measurable as it is a subjective term. Hence, an amount limit suitable for every person should be set.

Attainable: A reasonable amount and time and limit should be set so it is possible to achieve them. For example, saving up to buy a car on a monthly salary of ₹30,000-₹40,000 within one year is not realistic and attainable.

Relevant: Every individual’s financial goal should be relevant to and in sync with their individual financial needs and objectives. For example, if a person wants to save up for retirement, they should focus on saving to invest in schemes specially designed for retirement planning.

Time-based: In order to achieve a goal, it should have an end period which motivates one to achieve it. They cannot be never ending as different stages of life have different financial requirements. At the end of the time period, one should evaluate and see if they were successful in achieving it or not.

Duration of Financial goals

As mentioned above, setting time-based goals is very important. Duration of each goal varies and is dependent on its nature and the income and expenses of the individual. For example, saving up to buy a TV should take between 3-6 months depending on the saving capacity of each individual. However, saving up for retirement takes years of planning, saving and investing.

Financial goals can be classified into Short-term, Mid-term and Long-term goals.

Short-term goals have a duration of 2 or less than 2 years. Example- Stick to weekly/monthly budget, reduce unnecessary expenses.

Mid-term goals have a duration of 2-years. Example- Build and diversify portfolio.

Long-term goals have a duration of more than 5 years. Example- Make a retirement plan and implement it.

Mutual Funds 1O1- Advantages

Mutual Funds collect small sums of money from a large number of investors. This becomes a large pool of money which is invested into the market and the returns generated are distributed among the investors proportionately.

There are many advantages of investing in Mutual Funds:  

  • Professional Management: Investing directly in Equity is very risky for those who are not experts and lack the ability to track the market regularly.  Mutual Funds are managed by professionals with adequate  qualifications and experience.
  • In house research is undertaken to aid the fund manager. 
  • Top management involvement to guide the investment policy and the fund house philosophy.
  • Competitive performance resulting in constant improvement of portfolio and NAVs are disclosed at record timings.  
  • Diversification: Diversification is nothing but investing your money across different types of investments. An investor with a limited amount of funds might be able to invest in only one or two stocks/bonds. However, Mutual Funds invest in a no. of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because it is unlikely that all the stocks decline at the same time. So Unit holders of a mutual fund achieve this diversification with very less money that an investor cannot do on its own.  
  • Low Cost: Mutual Funds invest huge amounts of money on a regular basis. Therefore they pay very less % of the amount such as brokerage, depository and other types of charges as compared to the individual investors. So mutual funds provide a cost efficient way to invest in the financial market. 
  • Transparency: Mutual Funds have to publish their NAV on a daily basis and they have to periodically share the portfolio investments with the investors. They offer transparency to investors and have to publish their results semi-annually. Any important change in the scheme has to be duly informed to investors. 
  • Attractive Returns: Mutual Funds give very attractive returns in the long or medium term because fund managers invest in stocks after considering the fundamentals, future plans of companies with the help of trained research teams. They use every possible technique to save the investors’ money such as Hedging. So it’s a very good investment avenue used in the financial planning process. 
  • Well Regulated: All the mutual funds have to be mandatorily registered with SEBI. SEBI Mutual Fund Regulations 1996, as amended till date, governs the mutual fund operations and investments. The regulatory system aims to ensure the protection of interest of investors. The fund investments have to be as per the scheme’s objectives and there has to be complete transparency about funds investment and performance. NAV of the fund has to be published daily and scheme’s performance periodically. SID (Society for Information Display) & SAI contains all relevant and important information pertaining to scheme and fund and serves as an important investment document for the investor. Thus mutual funds are a well regulated investment vehicle in India. 
  • Choice of Options: In India, Mutual Funds offer different types of schemes to suit the varying needs of investors. Investors have different goals and objectives, which may range from retirement planning to investing for a vacation. Investor’s needs may include capital appreciation, liquidity, regular income etc. Because of several types of schemes launched by mutual funds catering to different investment requirements, investors have numerous options to choose from the wide range of schemes such as growth plan, regular income plans or Equity oriented plan, Gilt Funds. They also have the choice available in their method of investment. They can invest lump sum money or they can opt for periodic investment in the form of monthly installments through Systematic Investment Plan (SIP). Similarly they can opt for single withdrawal of entire funds when needed or monthly Systematic Withdrawal Plan (SWP). 
  • Liquidity: Open ended mutual funds are very liquid investment avenues because investors. Open-ended schemes are all the time open for subscription and redemption with the fund house itself. Investors can enter and exit from the scheme at any time at the prevailing NAV. Closed ended schemes offer limited liquidity to investors. Investors can buy the units only during NFO (new fund offer) and can exit at the maturity of the scheme when the mutual fund redeems the units at the prevailing NAV. However, all the closed ended schemes have to be necessarily listed on the stock exchanges in India. This provides a secondary market exit route to the investors of closed ended schemes. Though the schemes are listed but practically trading volumes in mutual fund units are negligible and therefore closed ended schemes don’t offer liquidity to investors. 
  • Convenience: Mutual funds provide a very easy and convenient way of investment as well as withdrawal of funds as compared to other investment avenues like Real estate, Debt instruments etc. Investors can invest in any manner either through distributors in the physical form or can buy units online whatever is convenient to them. Units can be held in physical or demat form. 

Mutual Fund is an investment avenue which gives the small investors an option to participate in the capital market with their small funds and limited knowledge of the volatile market.  

Mutual Funds 1O1- Types (Part II)

In this article, we will take forward the conversation we started in “Mutual Funds 1O1- Types (Part I)”. If you haven’t given the previous article a read at- https://eduindexnews.com/2021/06/22/mutual-funds-1o1-types-part-i/ ,I would recommend doing that for better understanding.

Now, that we are all caught up let’s start from where we left:

3. Debt Funds Debt funds aim to provide safety and regular income to investors through investing in the fixed income instruments like Government bonds, corporate debentures etc. The periodic interest received on these bonds is used to provide regular income to unit holders in the form of dividend. These funds are considered less risky in comparison to equity funds. However the NAV of these funds is influenced by the market interest rate movements. If the interest rates in the market moves up, NAV of these funds declines and vice-versa. If an investor plans to exit at the maturity of the scheme then he is not affected by such movements. There are several types of debt funds like: 

3.1 Diversified Debt Funds: Diversified debt funds invest the corpus of the scheme in the debt securities of various sectors and in the government as well as corporate debt instruments. Because of inherent safety of debt and added diversification, these schemes are considered to offer moderate to low risk and return to its investors. 

3.2 High Yield Debt Funds: High yield debt funds are the mutual fund schemes which invest in the below investment grade bonds with a rating of BB or lower than that. Because these bonds are quite risky therefore in order to attract the investors they offer high yield. Thus in spite of debt investments these schemes offer high risk-high return to its investors. The NAV of these schemes is quite volatile and the scheme’s portfolio has high default risk and in turn high return. 

3.3 Fixed Maturity Plan (FMP): FMPs are Close ended schemes, issued by Mutual funds, and mature at fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days. Some even have a three or five-year time frame. At the end of this period, the scheme matures, just like a fixed deposit. FMPs invest in fixed income instruments, like bonds, government securities, money market instruments (very short-term fixed return investments) etc. The objectives of FMPs are to generate steady returns over a fixed maturity period and protect the investors against market fluctuations. FMPs are typically passively managed fixed income schemes with the fund manager locking in to investments with maturities corresponding with the maturity of the plan. 

3.4 Floating Rate Debt Funds: These funds invest in floating rate debt securities. Example: rate of 10 year G-Sec +1%. Their NAV fluctuates less than debt funds investing in fixed rate instruments because their coupon rate moves in line with the market interest rate. 

3.5 Gilt Funds: Gilt funds as the name implies are the schemes which invest in the safest debt instruments. These schemes invest in the long term government bonds which do not have any risk of default. However these long-term bond prices are affected by the general interest rate movements and follow an inverse relationship. Thus NAV of the gilt fund goes down when interest rates in the market go up and vice-versa. A short term investor has to be careful about these movements 

3.6 Money Market or Liquid Fund: Money market mutual funds are often used by short term retail investors or corporates to park their short-term surplus funds. These funds offer the highest safety of principal and liquidity of funds to its investors. These funds invest the investor’s money in safe and liquid debt instruments like certificate of deposits, commercial papers, call and notice money market etc. These instruments are quite safe and have negligible default risk. At the same time they have very short maturities and therefore are not much influenced by interest rate movement because in such a short span of time there is very low probability of adverse interest rate movements. Thus money market mutual funds are considered as least risky among all the mutual funds 

4. Hybrid Funds: Hybrid funds are the funds which allocate the funds in the equity as well as debt securities. There are various types of such funds like: 

4.1 Balanced Fund: Balance funds also known as hybrid funds aim to provide the investor the capital appreciation of equity as well as regular income and safety of debt investment. They invest the pool of funds received from the investors under the scheme in the judicious mix of equity and debt instruments. The perfectly balanced fund will invest 50% of corpus in debt and 50% in equity. An equity oriented balanced fund will invest more than 65% of corpus in equity while a debt oriented balanced fund will allocate less than 65% of its corpus in equity. Thus they offer moderate risk and return to investors. 

4.2 Monthly Income Plan (MIP): The investment objective of the Monthly Income Plan is to distribute dividends among its unit holders, every month. It therefore invests largely in debt securities (75 to 80% of their corpus) so that periodic interest received from such debt investments can be used to declare regular dividends. However, a small percentage is invested in equity instruments to improve the scheme’s yield. 

4.3 Capital Protection Funds: Capital protection fund is a fund whereby the AMC (asset management company) safeguards the capital invested, irrespective of the fund’s performance. These schemes ensure the capital protection for the investors by investing in the government securities with no risk of default. A calculated portion of corpus is invested in fixed income instruments to ensure the capital protection and balance in equity for some capital appreciation in the portfolio. This calculated portion is decided by applying the time value of money concepts to the returns received in the fixed income instruments. For example, Let us assume in a capital guaranteed scheme, a person invests Rs.10000 and the scheme is a close ended scheme for 3 years. After 3 years, he has to be given back at least Rs.10000.Fund will invest Rs.7938 in Debt fund generating a return of 8% which will provide Rs.10000 after 3 years. Rs.2062 will be invested in the derivative market and will generate returns or at the most it may remain Rs.2062. If it remains Rs.2062, the investor will get back Rs.10000+2062= Rs.12062 a return of 6.45%. 

5. Fund of Funds: A mutual fund which invests the pool of funds collected from the investors under the schemes, in the other mutual fund schemes is called Fund of Funds. Just as a mutual fund invests the funds in different securities like equity, debt etc., a fund of funds holds units of many different mutual fund schemes and cash/ Money market securities / Short term deposits. A fund of funds permits investors to achieve the appropriate diversification and suitable asset allocation with investments in various fund categories that are all packaged in the form of one fund. However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds. 

While the liquid funds are perceived as least risky and therefore offering lowest returns, the sector funds give highest returns though at the cost of huge risk. Other schemes have varying risk-return profiles which may be categorized as high, moderate & low risk-return combinations etc. as shown in the figure.