The majority of Indian investors do not have a structured approach to savings and investment. The amount of money saved is determined by their spending patterns rather than a savings target. In a similar vein, most people invest haphazardly. When they have enough money, they invest it all without any specific goal—in bonds, stocks, post office small savings plans, bank FDs, etc.

Every individual has financial goals that are unique to  their needs. Some of these goals could be short-term like a foreign holiday which is 12-15 months away or mid-term like owning a car after 4 years, while others could be long-term oriented like funding your 3 year old child's higher education or having a financially protected retirement.

Whatever your needs might be, there are mutual fund schemes to help meet them. Mutual funds are a one-stop solution to all of your financial goals. There is a mutual fund basket for every type of investor; whether you are a conservative or aggressive investor, have a short-term or long-term goal, have a small or large amount to invest. You can use a variety of mutual fund schemes with various investment objectives to accomplish your financial goals.

SEBI allows Indian fund houses to offer different types of schemes for investing in different kinds of assets. Mutual funds come in all shapes and sizes, but choosing the right mutual fund scheme for your financial needs is the real question. Your objectives for mutual fund investments can vary, such as generating a regular income, wealth accumulation or capital preservation. Let us look at some of the common goals and the most suited mutual fund options to invest in for these goals.

1. Retirement Need

If your age is 35 years and you retire when you are 60, you have 25 years, making this a long term goal. The most suited mutual fund scheme category for this goal is Equity Diversified Mutual Fund which aims to achieve long-term capital appreciation through diversified investments. These funds invest across various sectors, thus reducing risk. Other than this, there are retirement oriented schemes offered by various mutual funds with specific features to cater your retirement needs.

2. Child's Higher Education or Wedding

Child's higher education is also considered as a long term goal, however, here the time frame is usually shorter than retirement. The mutual fund categories that can be looked at for this type of need are Equity Diversified Mutual Funds, Balanced Advantage Funds and Aggressive Equity Oriented Hybrid Funds. Other than this, there are solution oriented Children's fund which aim at funding future life events such as a child's higher education or wedding. If you would have done an SIP of Rs. 5000 every month, 15 years back for child's higher education, assuming a return of 12%, you would have accumulated Rs 23.79 lakh.

Moreover, other than the above mentioned mutual fund categories, you can invest in Gold Funds to achieve your need related to purchase of gold for your Child's marriage.

3. Tax Saving

Mutual Funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same. ELSS investments are eligible for tax deductions up to Rs. 1,50,000 in a financial year under Section 80C of Income Tax Act. Investing in ELSS funds can offer significantly higher returns in the long run than most other tax-saving investment options like PPF, NSC, NPS and 5 year Bank Fixed Deposits. ELSS funds serve a dual purpose of tax saving along with wealth creation.

4. Regular Income

SWP's can be very beneficial for investors who need regular cash flows from their investments for a long period of time. SWP stands for systematic withdrawal plan. If you invest a lump sum in a mutual fund through SWP, you may choose how much you want to withdraw on a regular basis and how often. SWP allows investors to generate both monthly revenue as well as an accumulated sum at the end of the maturity period. Hybrid funds such as Balanced Advantage Funds are good options for SWP as they have low risk as compared to equity funds and at the same time have potential to generate higher inflation adjusted returns in the long term.

5. Parking of Funds

If you are an investor looking for an option to park your surplus funds for a few weeks or even a few days, there are mutual funds available for you. Overnight funds and Liquid funds allow investors to make better use of extra cash they have in their hands. Compared to bank deposits, these funds are capable of providing better returns at minimum risk and also enable investors to access their funds efficiently and quickly.

6. Other Goals

If you have any goal other than the ones mentioned above, then classify it on the basis of tenure and risk profile. There are different types of mutual funds available based on your risk profile. If you are a risk taker, you would lean more towards equity mutual funds. If you are more risk averse, you would lean towards hybrid or debt mutual funds.

Moreover, there are funds for all needs— short, medium or long-term. For long-term goals, equity or diversified equity funds which invest nearly 65%-80% in equity can be considered. For medium-term goals, choose balanced or hybrid funds that invest in equity and debt in a 60:40 ratio. For short- term goals of 1-3 years, consider short-duration debt funds since they offer lower volatility and better interest than bank accounts.

7. Conclusion:

Mutual funds come in many different forms, and there is a mutual fund for everyone. Your financial goals together with your risk taking capacity determine which mutual fund(s) are best for you. You can consult a financial advisor or a mutual fund distributor who can handhold you throughout your investment journey and help you make the right decisions.

In today's fast-paced world, managing personal finances can be a challenging task. Whether you are seeking professional guidance or prefer a do-it-yourself approach, understanding your financial situation is crucial. One effective way to gain insights into your financial strengths and weaknesses is by utilizing financial ratios. These ratios provide a quantitative analysis of your financial health and can guide you in making informed decisions regarding the different aspects of your personal finances. In this article, we will explore six common financial ratios that can help you evaluate your current financial standing and create a solid foundation for financial well-being.

1. Emergency Fund Ratio:

Having an emergency fund is a vital component of financial stability. It acts as a safety net, providing you with readily available funds in case of unexpected events such as job loss or other emergencies. The emergency fund ratio measures the number of months your cash savings can cover your monthly non-discretionary (unavoidable) expenses. The idea is simply how many months can you continue to live comfortably in absence of any income.

To calculate this ratio, divide your cash/liquid savings or investments by your monthly non-discretionary expenses, which include utility bills, rent, educational fees, EMIs and other household expenses. Financial experts generally recommend maintaining an emergency fund equivalent to at least three to six months of these expenses. The higher the emergency fund ratio, the better prepared you are to handle unforeseen circumstances.

2. Savings Ratio:

Saving and investing the money for the future financial goals is a very crucial aspect of personal finance. Your savings ratio represents the portion of your income that you save and invest aside for your financial or life goals like retirement, education for child, purchase of home /car and so on. It is generally recommended to save at least 10% and 15% of your income each month to build a healthy savings cushion. However, the ideal savings rate may vary depending on your specific goals and age and the amount of savings you can manage. When one is young, the income can be less and expenses /liabilities more since you are in the consumption phase and thus the savings can be less. However, when you are accumulating phase of your life, with higher income you should aim for as much as you can possible manage. Evaluating your savings rate regularly can help you stay on track and make adjustments as needed. By prioritizing savings and managing expenses effectively, you can build a strong financial foundation for the future.

3. Debt to Total Assets Ratio:

The debt to total assets ratio provides insight into the portion of your assets that your lenders own. These debts would include your home loan, car loans, personal loans, credit card outstandings and so on. As you repay these debts your ratio decreases. This ratio is typically high in younger individuals and gradually declines with age as one builds assets and pays off debt. A lower debt-to-total assets ratio indicates a healthier financial situation, especially as you approach retirement. This can be also a good indicator of personal financial well-being and the debt burden on the lines of the Debt to Equity ratio for companies that research analysts track. The ratio is calculated as your total debt divided by your total assets. The aim should be to have a lower ratio here and is indicative that the debt burden is less.

4. Net Worth to Total Assets Ratio:

Your net worth is the difference between your assets and liabilities. It represents the value of what you own after deducting what you owe. The net worth to total assets ratio, also known as the solvency ratio, measures the percentage of your total assets that you own. Tracking this ratio over time allows you to monitor your wealth accumulation and provides motivation during debt repayment. This is similar to the earlier ratio but the perspective is different as we are evaluating your actual networth here and not the debt against total assets.

Younger individuals commonly have a net worth to total assets ratio of around 20%, while individuals in retirement should aim for a ratio closer to 90% to 100%. Achieving a higher ratio indicates significant progress in eliminating debts and building wealth.

5. Liquidity of Portfolio

The liquidity of your portfolio refers to the proportion of your total net worth held in liquid and disposable assets. This ratio depends on your financial goals and should be evaluated accordingly. If you have short-term goals or goals nearing maturity, a higher proportion of liquid assets is recommended. Quite often we have seen that the wealth or net-worth is locked in assets such as land, property, gold and so on which cannot be disposed off in times of emergency. Further, for properties used for consumption, like residence, there is some debate as to whether it should be considered at all when calculating this ratio.

To assess the liquidity of your portfolio, divide your liquid assets by your total net worth. It is essential to strike a balance between financial and non-financial assets or liquid and illiquid assets, considering your specific financial objectives. There have been many cases where people have suffered and had to borrow money even though they had sizable money locked up in illiquid assets.

6. Debt Servicing Ratio:

The Debt Servicing Ratio is a measure of your ability to repay your debt obligations. It is calculated by dividing the monthly debt payments by the monthly income. A good Debt Servicing Ratio is generally considered to be one-third or less. This means that your monthly debt payments, like your EMIs, should not ideally exceed a third of your monthly income. A higher ratio indicates that there exists the risk of financial problems, as one may have difficulty in making debt payments. A higher ratio also means that not enough is left for savings and for meeting discretionary and non-discretionary household expenses. However, the ideal ratio is subjective and will change with time and usually would be higher when one is young and falls when one has higher income levels.

Conclusion:

In brief, understanding and utilizing personal finance ratios can provide valuable insights into your financial situation and guide you in making informed decisions. By regularly monitoring these ratios and making necessary adjustments, you can create a solid financial plan to achieve your goals. Whether you decide to seek professional advice or take a DIY (Do-It-Yourself) approach, these ratios will help you gain a better understanding of your financial health and focus on areas that require attention. Start evaluating your personal finance ratios today and pave the way for a brighter financial future.

Have we reached all of the goals that we've set for ourselves in life? Leaving other goals aside, let's talk about our growing list of financial goals that we set and try to achieve through our investments. Despite estimating that a huge amount may be required to fulfill our needs, we hardly take any actions required to make them a reality. Most of us adopt a laid back approach and do not match the savings required for achieving those goals. In fact, the question we should ask is whether have we even identified our goals and found out how much we need to save? Unfortunately, we end up compromising on our precious life goals like retirement, higher education for children and so on just because we cared a little less even though things would have been very different, had we taken this up on priority with all seriousness.

The fact of the matter is that people who have identified their financial goals and planned their investments around these goals are more likely to achieve them. It is very obvious isn’t it? We can see a substantial difference even when we compare the outcomes with 2 persons having the same goals and who are saving an equal amount of money today, the only difference being, one has identified his goals and mapped investments to the goals and one who hasn’t done so. What can be the possible reasons for the success of the first person in our example? Let’s see…

1. Identification/ Setting of objectives: Financial objectives are directly related to a person's or a household's lifestyle preferences and needs. It is important to consider that your financial needs align with your desired lifestyle and income levels. Quantification of the needs helps clear this for us. For example, if you aim to retire early, you need to quantify the amount of savings required and establish a clear timeline. Adapting financial objectives to align with evolving lifestyles and needs may require adjustments and flexibility. This is the reason why identifying financial goals early on and then tracking them helps you as you know what is required and whatyou need to do about it.

2. Clarity/ Purpose of Investment: It is not sufficient to just identify needs. Determining your financial objectives and needs in detail might therefore have a stronger influence. These can include both immediate needs (like saving for a trip or a down payment) and long-term needs (like planning for retirement or paying for children's education). You will now more accurately decide on your investment's time horizon, the risk tolerance levels and the required asset allocation if you have specific objectives in mind. With limitations on saving funds, you would be forced to prioritize investments and to cut back or delay non-crucial goals like say upgrade of cards or exotic holidays. Your investments will have a specific purpose and will be best channelised to achieve them.

3. Focus on the right place: Clarifying your investment objectives is crucial given that they should be your primary emphasis rather than product or scheme selection. All that really matters is not what the market is doing or what other people are saying. What matters for you is whether you are on your way to achieve your goals or not. That’s important and rest everything is noise. Once you make a list of your financial goals and keep focus rightly on those things, you are less likely to make mistakes or act irrationally or let your behavioural biases impact your goals. You would be less likely to redeem your investments and make unnecessary expenses. Your focus would be where it actually should be. 

4. Course Correction: One ought to begin by reviewing his investments and determining whether they still line up with his financial goals. Check to see if any adjustments to your goals are necessary due to changes in your personal situation or the state of the market. Regular evaluation and review of your financial plans and your investments is required - either at a fixed frequency or as necessitated by sharp market movements, helps you to stay ahead of the outcomes and identify corrective actions. This naturally means that you would be more likely to invest when markets have corrected or to change asset allocation when the markets are at highs. Doing these small adjustments over time ensures that your financial goals are much more likely to be achieved.

5. Investment Behaviour and Discipline: With the need-based investments and financial planning, your entire approach to investments would change. You would likely see markets in a different light and start evaluating the impact and outcomes not today but in the distant future for any action that you take. This change in approach automatically eliminates any impulsive behaviour and emotional decision making based out of greed, fear or hope. Decisions instead would likely be more based on logic and research. With time, you shall create your own style, rules and principles of investing, helping your transition to a wise and experienced investor. 

6. Achieving Future Financial Needs: Clear defined goals and saving for them are prerequisites for achieving them. You have a much lesser chance of reaching your needs and objectives without clarity and a proactive strategy for saving. The last link in the circle of financial stability and wellbeing is indeed achieving future financial objectives. You can feel secure and at ease knowing that you have the means to support yourself and achieve the financial goals that you had set out for yourself, years ago. That sense of pride, peace and satisfaction for your family and yourself, is indeed priceless.

Bottom Line

Overall, the need-based investment approach or the financial planning approach for planning your savings is how all investments should be. A structured and goal-oriented method of managing your finances offers a lot of benefits and advantages and holds the promise of transforming your financial journey in life. However, to do so just by yourself would be difficult. We would encourage you to talk with your financial products’ distributor or advisor to know more and seek expert guidance.