Do you have a purpose behind your mutual fund investments, or are you putting in money aimlessly? If it’s the latter, it’s time to pivot to goal-based investing. Goal-based investing is the investment strategy where you align your investments with your financial goals within a specific timeframe. However, before you carry out goal-based investment, here are six key don’ts you must keep in mind.
- Don’t set unrealistic goals: We all have grand financial objectives we aspire to reach. Daydreaming is fine, but when it comes to planning your investments, keep it grounded in reality. Factor in your current income, expenses, and debts. Also, never neglect the timeline for each of your financial objectives.
- Don’t chase trends: In this era of information overload, it is easy to get lost and invest in current trends. You might want to try out the new fad your friend or colleague has tried and had massive gains. But wait. It might be detrimental to your finances. If you get tempted, reduce your exposure to such sources and stick to your goal-based investment journey.
- Don’t ignore emergency funds: While high returns might be enticing, never forget to set up an emergency fund first. This fund serves as a financial cushion for unforeseen crises, such as medical emergencies or job loss. Having at least three to six months’ worth of expenses set aside in a liquid fund can prevent you from liquidating your goal-based investments in times of need.
- Don’t panic during market volatility: Financial markets are inherently volatile, causing investors to act out of fear. Panicking and selling during a downturn often leads to regrets when the market rebounds. Stick to your original investment strategy instead of making rash decisions during volatile times.
- Don’t forget inflation: Ignoring inflation is a common mistake. Investing based on today’s costs without considering the rate of inflation will leave you short of your financial objectives. Be sure to factor in sector-specific inflation; for instance, if you’re saving for your child’s college education, consider the rising cost of tuition and other related expenses.
- Don’t time the market: The notion of entering and exiting the market at the perfect moment is largely a myth. In reality, this strategy often backfires, causing you to buy high and sell low. Instead, opt for a Systematic Investment Plan (SIP) in mutual funds. This approach negates the need to time the market, as you continue investing a consistent amount regardless of market conditions, accumulating more units when the market is down and fewer when it’s up.
To conclude, if you are investing in mutual funds, then make it a goal-based investment. This will ensure you do not redeem or backtrack before the timeframe of that particular goal.
The views are personal and are not part of the Outlook Money editorial Feature.
CFP Prakash Jain, Director, Arthaprakash