MUTUAL fund investors often make use of this instrument to achieve a long-term target. This process of investment requires that there has to be the right amount of contribution to the various options available to them.
This can be undertaken in two different ways.
One where the investor chooses a fund of funds and the second option involves selection of a bunch of individual funds in the form of a portfolio. In undertaking the second route there are a few things that needs attention.
Final target: The first requirement for the investor is to mention the final target that they seek to achieve. This target will become the base for their entire efforts.
The final target has to be mentioned as a corpus of a certain amount that has to be built by a specific time period.
Examples of this route are situations where the individual wants to accumulate a sum of Rs 20,00,000 for the education of a child in 10 years or get together a sum of Rs 2,00,00,000 for the purpose of their retirement in 20 years.
Arriving at the end figure will require it own working based on the need as well as the ability to achieve the target.
Rate of return: There will be an exposure to different kinds of assets as well as funds when the investment is being made.
According to the nature of the fund there will have to be a target rate of return that has to be estimated for that specific category of fund.
For example there will be some assets that will be in an equity oriented fund so an investor might consider the target rate here as 15 per cent while the amount for a debt fund might be at 7 per cent.
It has to be ensured that the rate selected is neither very high nor very low because this has the ability to distort the entire picture.
A similar working will have to be done when it comes to the other category funds like debt and hybrid ones depending upon the proportion of their exposure to different asset classes.
Allocation: The allocation of the investment amount across the different funds then has to be made. This will result in the allocation across various asset classes as well as a situation where the different type of funds will actually be selected.
So for example if 55 per cent of the asset has to be in equity then the investor has to decided which kind of equity funds will be selected.
The choice also covers whether these will be large cap funds or mid cap funds or even multi cap funds. Within the fund category also the investor then has to select specific funds.
Amount invested: The next step comes with the actual amount that is invested each month in to the various funds as part of the entire investment exercise.
A systematic way of investment is desirable so that the entire effort is actually put into action to achieve the goals. There are actually two steps to this entire process where the first one involves the individual investing a certain amount.
The next part comes with the entire analysis of whether this effort is actually enough to ensure that the required tasks will be achieved.
For example a person might want to achieve a target of a corpus of Rs 15,00,000 in 7 years time.
If the amount invested is Rs 8,000 a month at an expected earnings rate of 12 per cent then there is going to be a shortfall of nearly Rs 4,50,000 at the end of the period.
Once this analysis is completed then it will be clear as to whether the original amount that is intended is actually enough or whether there is a need for some additional investment. In this case raising the monthly investment by Rs 3500 will ensure that the target is achieved.
Changes: There is also a need to review the entire investment process at regular time intervals because this will show whether the plan is progressing according to the manner in which it should.
Portfolio details of the mutual funds are available at regular intervals while the NAV is available daily so this will aid the efforts to ensure that the situation is going smoothly.
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