What is the key to investing in mutual funds when one is planning for a goal?
Mutual funds are well suited for goal-oriented investing. The first thing to consider in this regard would be the time period of your investment, i.e., for how long you have to invest before you need the money out to fulfil the financial goal you have. For instance, a lot of people save money for their child’s education in this manner. So, if a child is 5 years old and starting school now, the parent would have about 12 years before money would be needed to take care of college expenses. This aspect—the time frame—would determine the amount of risk your portfolio can take. The longer the time frame, the more risk (in the form of equity market investing) that one’s investments can take.
Once you know the time frame and how much money you need to realise at the end of it, you would need to do a calculation to figure out the amount of money you would need to save periodically (every month, for example) and invest to reach the goal. This is a simple, but critical step to ensure that you get to your goal in the time you have for it.
The final aspect to consider would be the nature of the goal—fixed-date or flexible. In the example above, when it comes to a child’s education, it has to happen in a particular year. If the goal were, for example, a foreign vacation, then there would be certain flexibility about the target date. Once again, this factor would play into the risk profile of the portfolio, and would also determine how quickly one should de-risk the portfolio, as one gets closer to the goal. A fixed-date goal would mean a conservative approach to shoring up one’s assets as opposed to a flexible goal date.
Once you have considered these factors, you would know how much to invest, for how long, and how much risk you can take during the course of your investments. With all of this information, you can design a portfolio of funds and get going on the journey to your goal.
What is the difference between core and satellite views? Should we change one investment to another (systematic investment plan, or SIP, to lump sum, or vice versa) according to market conditions?
Mutual fund portfolios are sometimes designed to have two parts to it: core, which represents the main, long-term stays in the portfolio; and satellite, which represents the part that could be subject to scheme changes periodically. The method of investing in a fund (SIP or lump sum) should be determined by the nature of the fund and whether or not it is subject to market volatility. A more volatile fund such as a diversified equity fund would be more suitable for SIP investment than a debt fund, for example. This choice does not indicate or influence whether a fund is in the core portion of your portfolio or the satellite.
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