How to tag goals to your mutual fund investments?

Now that is where the challenge arises! You already have some SIPs running and you are going to start some new SIPs. How do you distinguish what is required for retirement and what is required for your daughter’s education and what is required for your home loan margin?

May 05, 2019 12:05 IST India Infoline News Service

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Setting financial goals and crystallizing the corpus required is one step in financial planning. The next step is to create an asset allocation plan that helps you reach these financial goals. Now that is where the challenge arises! You already have some SIPs running and you are going to start some new SIPs. How do you distinguish what is required for retirement and what is required for your daughter’s education and what is required for your home loan margin? That is where tagging goals comes in handy.
 
Goal tagging: Gives method to the madness
In goal tagging what you basically do is that any mutual fund SIP you start or already own is tagged to a specific goal. There could be multiple SIPs that are tagged to a single goal. Alternatively, there could be a large SIP that is split between 2 goals. That is perfectly legitimate. The entire idea of tagging is that you know what each SIP is intended to achieve.
 
Why is tagging of mutual funds to goals so important?
It is all about giving a method to the madness. If you have too many goals and too many SIPs, you may not really know where you are headed. Each of your mutual fund SIPs need to be evaluated regularly vis-à-vis the goal it is intended to achieve. That tells you if the SIP has the ability to achieve the milestones. Based on these cues you can rebalance your overall mutual fund portfolio to ensure that you are on track to achieve the financial goals.
 
How much you need to save in SIPs to reach your goals?
Pradeep who is 28 years old with a 2-year-old daughter is creating a long term financial plan. He estimates that based on his extrapolations, he would require Rs2 cr for his retirement at the end of 25 years, Rs1 cr at the end of 15 years to send his daughter to Oxford and Rs10 lakhs at the end of 5 years to pay his home loan margin. In addition, he is also planning to save Rs5 lakhs for an East European holiday at the end of 3 years. The golden rule is that long term goals are funded through equity funds and short to medium term goals are funded through debt or balanced funds. Let us first look at how these goals need to be financed.
Goal After X Years Corpus Needed Invested in CAGR Yield Monthly SIP
Retirement 25 years Rs2,00,00,000 Equity Funds 14% Rs7,419 pm
Child Education 15 years Rs1,00,00,000 Equity Funds 14% Rs16,507 pm
Mortgage 5 years Rs10,00,000 Balanced Funds 12% Rs12,244 pm
Holiday 3 years Rs5,00,000 Debt Funds 9% Rs12,150 pm
 
By saving Rs48,320 per month (rounded to Rs50,000), Pradeep can ensure that all his life goals are achieved automatically. This is all about making money work hard for you. Now comes the methodological challenge; how to tag mutual funds to goals.
 
How to go about tagging mutual funds to your goals?
  • Obviously, a total monthly outlay of Rs50,000 will have to be spread across multiple funds without making your fund portfolio too bulky. Here is how to go about it.
  • Your overall equity fund exposure (Rs25,000 rounded off for simplicity) can be spread across 3 funds. While 2 funds of Rs10,000 each can be diversified funds, one can be multi-cap for alpha. More importantly, tag them specifically with the goal.
  • Since your mortgage SIP is a medium term SIP, you can just stick to one balanced fund. Since 5 years may not always be favourable for equities, it is suggested to go for a MIP fund that has less than 20% exposure to equities. Again let this be tagged.
  • Lastly, for your holiday goal, take care of two things in your debt fund. Avoid long duration funds and avoid credit opportunities funds. In a 3 year time frame, liquidity management is critical. Again ensure this fund is specifically tagged to the goal.
 
Finally, fund selection must be driven by pedigree, index outperformance, and consistency. That is the key!
 
Does this seem too much to digest? There are a few online goal planners that can make your life easier. These tools help you with your plan calculation; scheduling your investments; recommend asset allocation and portfolio; and timely rebalancing.

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