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1. Choosing educational funding for children:
When it comes to investing in mutual funds for your children’s future, the basic rules are the same as they are for any other long-term aim. However, simply investing will not suffice in this case. You must be cautious when it comes to the risk management of your corpus, especially if your child is preparing to begin his higher education.
Making the money available at a time when your child needs it is just as vital as investing. As a result, debt funds play an important role in this situation. Investing in stock has numerous advantages when you have time on your side. However, once you’re fewer than three years away from your target, you should maintain a careful eye on the market.
When you’re getting close to your goals, you should de-risk your portfolio to ensure that the profits you’ve made aren’t wiped out. To put it another way, when you get closer to your goal, start shifting from equity to debt to protect your profits.
Based on the interest rate scenario at the moment, you could choose to move away from high-risk options and into liquid and short-term debt funds or somewhat riskier debt funds, such as bond and gilt funds. Short- to long-term bond and gilt funds, for example, would perform well if interest rates were to decline. Stick to liquid funds if interest rates remain stable or rise; they are safer than the rest of the debt schemes, if not the safest of all financial products, and they will still earn you more than your savings bank account.
Step by step – through a Systematic Investment Plan or SIP – is the best strategy to develop enough corpus for your child’s future. It’s best to get started as soon as possible. Of course, you’ll need to stop along the route now and again to make sure everything is going according to plan. The closer you go to your financial goal, the more cautious you need to be to avoid making a mistake.
2. The importance of a debt funds in a retirement portfolio:
As you become older, reduce your equity fund holdings slightly; the aggressive investor should reduce his stock holdings from 80% to 70%, and the conservative investor from 60% to 40%. With around 15 years till retirement, you should begin to play it safe and manage your debt and equity exposure. For example, a conservative investor would choose a debt allocation of 10% to 20% higher. Floating-rate funds and fixed maturity plans are two options for debt. Balanced funds are another debt-equity mix choice for the semi-aggressive investor.
Plan of action:
Follow the life cycle approach to investing while saving for retirement using mutual funds. Maintain a healthy balance of equity and debt as you become older.
With about ten years till retirement, your top concern should be to protect your collected cash. Plan your de-risking approach ahead of time and wait for the right opportunity to move your money from risky stock to safer debt. A major amount of your portfolio should have been transferred away from equity and into debt funds by the time you are 1-2 years away from retirement.
3. Purchasing a home:
Investing in mutual funds not only helps you build wealth but also helps you build assets. They play a vital function in assisting in the construction of one’s most valuable asset—home of one’s own.
Most households, especially those with both partners working, can afford to pay the equated monthly installments (EMIs). The largest challenge, though, remains to accumulate a large lump sum to pay the down payment on the house. Mutual fund schemes come in help in this situation. All renters ask why they should waste their hard-earned money on costs when they could use it to buy a home and build an asset.
That is particularly true now when property prices have likely dropped out and; home loans are readily available, owing to housing finance companies giving low-interest loans to customers. If you plan to buy a property in the next two to three years, mutual fund plans can help you save money, especially for the down payment.
Obtaining monies from friends, relatives, or pawning gold may not be the ideal method for obtaining funds. Prepare ahead of time to avoid relying on such sources as much as possible. Start saving for your down payment if you believe your circumstances are suitable for purchasing a home. Get a sense of how much you can afford to spend and how much you can pay in EMIs. Calculate how much margin money you’ll need, which is typically 20% of the home’s value. After that, figure out how much you need to save each month.
Where should you invest your money?
If your time horizon is shorter than a year or just a year away, you should put your money in a money market or liquid fund. These funds have the lowest volatility because they have no exposure to equities. The goal is to keep the money safe and not take unnecessary risks with it. Select at least two or three debt funds to diversify your portfolio and begin saving using a systematic investment plan (SIP). Even if you’re willing to take a chance, maintain the portfolio oriented toward debt.
Plan out your strategies:
Keep in mind that even debt funds are subject to interest rate risk. So, at least two years before you attain your target, switch to less volatile debt funds, such as short-term debt funds. When you’re only a year away from your objective, put all of your savings into a liquid fund. Your tiny monthly saves may not strain your household budget, but they will add up to a lump sum large enough to cover your down payment requirements for a property.
As indicated in the figure below, investors have a wide range of options for investing based on their risk-return profile and life stage. It should be noted that the schemes chosen are merely examples. A young investor at the outset of her career, for example, may have a higher risk appetite and time horizon, so she would consider investing in long-term debt categories such as monthly income plans, gilt funds, long-term income funds, and credit opportunity funds. The risk-taking capacity of an investor may deteriorate as he or she grows older.
As a result, investing in shorter-term debt funds, such as fixed-term plans, liquid funds, and ultra-short-term debt funds, may be a viable option.
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