Do not save money
Surprised? Well, what we mean is do not be happy stashing away money in your bank account. Your bank fixed deposits are unlikely to offer higher returns than inflation. When that happens over a long period, your money loses its value. You are most likely to end up with a much smaller corpus than you have imagined – the cost of the college fee would have ballooned much higher than you have anticipated while saving for it. You can avoid it only if you have huge savings.
Do not pick a random number
Most mutual fund investors have the habit of a choosing a round figure while planning for their long term financial goals. We often get queries where investors want to create a corpus of Rs 1 crore – be it for their retirement or child’s education. Needless to say, the target corpus may prove inadequate to take care of the goal. Taking a clue from the cost of inflation index, 15 years ago if you could purchase an item for Rs 1 crore, you will need Rs 2.48 crore to buy the same item today. Value of your money is eroding with each passing day.Find out the current cost of the college or course fee, inflate it by a realistic number for every year, and you will have your target corpus. Once you know your target corpus, you can figure out (use PMT formula in Excel or online calculators) how much you need to invest every month to create it.
Don’t be adventurous
We often come across lines like ‘I have twenty years, so I will go with small cap mutual funds.’ No, you don’t choose a mutual fund based only on your investment horizon. You should choose a mutual fund scheme based on your goal, investment horizon, and risk profile. That means if you are a conservative investor with a 10-year goal, you should stick to large cap schemes. Even if the investment horizon is 20 years, a conservative investor should not choose a small cap scheme. This is because often investors lose their nerve when the market gets into a tailspin. They tend to abandon their investments in panic. That is why it is imperative to choose a scheme that matches your risk profile.
Don’t be too conservative
Some investors are very hesitant to take any kind of risk. This may not have anything to do with their risk-taking capacity. Mutual fund advisors say it is just a mindset they fight all the time. Such a mindset is perfectly fine only if these people could save a lot of money every month. But, as you would know, it is not possible to save a tonne when you have so many bills to pay and so many goals to take care of. That is why you should reassess your attitude to risk. This doesn’t mean you should take unnecessary risk. Take calculated risks, so that you have enough money for your goals.
You don’t have to do it on your own
The recent fad is ‘Do It Yourself’ financial planning and investment. Everyone believes that they can take care of investments without any help from experts. You may be able to do it if you know enough about financial planning and investing in mutual funds. However, even if you know enough, you might find it difficult to devote enough time for the exercise. If that is the case, do not hesitate to approach a mutual fund advisor or financial planner. Try to educate yourself while dealing with the advisor or planner – try to clear your doubts on every advice. This will help you to ensure that the advisor is not taking you for a ride.