Many of you who have been considering investing in or already invested in equity mutual funds know that it is meant for long term goals. The definition of “long-term” though changes from 5 or 7 or 10 or more, depending on which investor you ask, no matter what the experts say. It’s because we all perceive different lengths of time differently.
The point of this article though is to make sure, that irrespective what you think your definition of “long-term” is, you don’t do the following when linking your goals to equity mutual funds.
1. Chasing returns rather than your goal amount
Needing Rs 50 Lakhs 15 years from now for your child’s education is different from chasing 30% “returns” from your equity mutual funds. Yes, it is the job of equity mutual in most cases to outperform the benchmark, but if you want above normal returns rather than above-inflation returns you are likely to end up chasing last year’s performers and funds which take higher risks to get higher returns.
We believe a 12% growth rate going forward is a reasonable expectation from equity as an asset class, but only over the long term. This is what you should keep in mind when planning your goals.
Don’t forget the short-term and allocate sufficient amounts for them in fixed income based funds. At the very least, have an emergency fund in place that has at least 4 months of your income.
2. Not having your asset allocation in place
Investing in equity without any plan for the rest of your goals which are coming up in less than five years can be an easy way to not just increase your anxiety but also put at risk your financial well-being. Don’t forget the short-term and allocate sufficient amounts for them in fixed income based funds. At the very least, have an emergency fund in place that has at least 4 months of your income.
3. Not knowing when to take your money out for a big long-term goal
A plan to take your money out before you need it in case of equity mutual funds is extremely important if you don’t want to become a victim of the inherent volatility of equity. Equity does have a history of beating inflation, but it comes at the cost of volatility. Markets can be down for months or years, just as they can be up for years, even if the long term trend is upwards.
In the example mentioned above where you need Rs 50 Lakhs for your child’s education, you need to start systematically moving your money from equity to fixed-income based funds at least 2-3 years before the goal is coming up. As was seen, in March when the market saw a fall of 27% from its peak in January, staying invested for longer than is appropriate can be a mistake.
One smart yet simple way to do this it to use a systematic withdrawal plan to move out of equity in a phased manner the nearer you get to a goal and remove the uncertainty that comes with timing the withdrawal.
While there are many things that one needs to keep in mind when investing in equity for their long term goals, keep the above in mind and you will avoid the biggest pitfalls.
To sum up:
1. Focus on goal amount and not so much trying to go for the highest returns. Plan the timeline for your goal, keeping in mind the expected rate of growth equity offers.
2. Have a proper asset allocation in place keeping in mind your needs
3. Have an exit plan well before you actually need the money