These are the very common questions asked by all those who consider financial Planning as an exercise only to make investments. Though they try to come from the goal side but still are interested in only investments and that too one time.
And our common reply here is that what about other goals, and why only 5 years? What if you require money after 3 years or after 7 years?
Some answer this clearly as they do have a single goal after 5 years and some people try to dodge this question and tell that- for them, 5-year is a long-term tenure and thus, they just want investment for the long term.
Where to invest for a 5-Year goal?
If the goal is clear and that too a one-time requirement, you should not be high on equity investments, even if you feel that markets are at low levels or expected to rise in near future. All these stories are acceptable only when your goal is flexible and you may postpone it if any untoward incident occurs.
When the goal is quite certain, then it’s not advisable to take chance. In fact, you should take a calculated risk by not ignoring the equity and go with a balanced approach.
Here 2 categories of funds may be suitable – Balanced Advantage funds or Equity Savings funds.
In Balanced Advantage Funds, the equity exposure ranges from 30-80/90% as per the specific scheme structure and the other portion is managed on the arbitrage and debt side. (Also Read: Balanced Advantage Funds or Multi-Asset Funds- which one is better?)
In Equity savings funds, the direct equity exposure cannot go beyond 40%, and the rest allocation remains in Arbitrage and Debt. (Read more on equity savings and other hybrid funds in this article)
Both these funds manage the Equity portion as per the market valuation and their in-house valuation matrix.
So, this structure suits well when you don’t know which side the market is going to go in the medium-term and where you do not like to compromise on returns if it goes up and neither would like to lose more if it falls down.
However, do note that even if the equity allocation is managed actively, still the basic nature of equity is volatile and may bother a conservative investor for a short time period. If you are way too conservative then you should better avoid both of these.
How to Invest for Long and Short-Term Goals?
This is where the second type of Investors who start with goals but ultimate focus is on the investments with a vague idea of tenure of investments or definition of Long/Short term goals come in.
First and foremost, it is important to understand that there is no specific definition of Long-term, though for the short-term we may assume a 2 to 3-year time frame.
The long term should always be flexible or long enough that 4-5 years of volatile market movements should not bother you or your goals. Generally, 5 years is called as long term, but if there is any goal due after 5 years then it is advisable to go safe at least 2-3 years before the goal date.
This automatically leaves you with a time frame of only 2-3 years to take an equity (aggressive) call. Thus, if we go with this formula and have a certain goal lined up then 7 years is the minimum time frame to call as long term as in that case only investment in equity can stay for 5 years, and post that the money can be moved to debt/conservative side.
Now when you are clear on the definition of the long and short term, be clear on your goal requirement after adjusting Inflation numbers in the same.
There are different categories of equity and debt funds, where it is easy to understand what category of funds should be used for what tenure of goal. (Here’s all you want to know about Mutual fund basics)
Just keep in mind 2-3 years’ goal should not be into Equity Oriented funds, 3-5 years’ goal you may check Hybrid conservative, 5-7 years tenure go with Balanced Advantage fund, for 7y+ tenure, have Asset Allocation approach as per your risk profile and diversify your equity investments.