Even before you start investing to meet your goals, keep in place an emergency fund equal to about 6 months of household expenses.
Running household budgets without any fuss has always been a stronghold of homemakers. Managing household expenses has never been rocket science for them. What they generally do is to simply create separate cost-heads and earmark funds towards them. Similarly, meeting life goals can be done easily through the creation of separate portfolios rather than trying to achieve all your goals in one go.
The need to create separate portfolios is because not all of your goals will arise at the same time. And, meeting goals at different life stages means you need to invest in different asset classes in order to achieve those goals. For example, the goal of home buying could be 3-5 years away while children’s education could be 10 years away. Similarly, a kid’s marriage expenses might have to be met about 18 years down the road. The retirement similarly may be 30 years on the horizon. If the number of years to different goals is not the same, you need to invest in different assets.
The idea is to first identify the goals and then based on their horizon, choose to invest in varying asset classes. Some of the popular debt assets are bank fixed deposits, debt mutual funds, and other fixed-income investments such as post office savings schemes, etc. They are primarily meant for capital preservation. Similarly, some of the popular and common equity assets are shares, equity funds, equity funds in Ulips and NPS.
When the goals are farther away, you have time to take risks in volatile assets such as equities. For long-term goals, therefore, equity mutual fund schemes preferably through SIP investing helps the investor. For medium-term goals, you need to still take some element of risk and invest a portion of funds into hybrid or balanced mutual funds. And, when the goals are within three years, there is hardly any time to take risks. For such goals, investing in debt funds like liquid funds and short-term mutual funds is suggested.
Even before you start investing to meet your goals, keep in place an emergency fund equal to about 6 months of household expenses. This will help you to meet an emergency situation without dipping into your investments. Use bank sweep-in fixed deposits or liquid mutual funds to park money for emergency use.
If your goal is to arrange for the down payment of a home loan, about 3-5 years from now, then balanced funds or hybrid funds fit the bill. Balanced or hybrid funds, as the name suggests, allocate assets in their portfolio to both equity and debt thus managing the risks.
It’s better to have separate education portfolios for every child. However, if the age difference between kids is not much, there shouldn’t be any difference in the strategy for the first and the second kid.
Further, keep separate higher education investment portfolios for each child. You could invest in diversified equity mutual fund schemes (mostly large-cap), children’s unit-linked insurance plans, gold exchange-traded funds (ETFs) and large-cap funds, among others.
If you have invested in real estate to fund your child’s higher education, do not wait till the goal is near. Rather sell when the prices are high even if the goal is still a few years away and invest the proceeds in low-risk investment options. As it’s a highly illiquid asset at the best of times, it takes a while to get the right price.
If you are young, you have more time on your side and hence your retirement portfolio can be a little more dynamic. Build a base with 2-3 well-performing diversified equity mutual funds schemes and mid-caps funds. Needless to say, SIP’s should be the approach.