When we appreciate the benefits of long term planning towards our financial goals, we need to focus on the ideal investment vehicle for achieving these goals. It’s important to choose investments that offer a combination of returns, risk, tax efficiency, and liquidity that will fit into your financial plan. Here are 10 reasons why:

You can diversify in mutual funds either by default or by design to reduce your concentration risk. You can allocate your funds across equity, debt, liquid, and gold to reduce your concentration risk. Mutual funds themselves also attempt to reduce your risk by diversifying across asset classes. Over the long run, this provides you with a natural risk management system.

While mutual funds are highly liquid, they are also for the very long term. Disengaging from other assets can be quite costly. Even though your plan-related investments are for the long term, there may be an exigency that requires your assistance. Mutual funds, on the other hand, are highly liquid and have a low impact cost.

In spite of the 10% tax on long-term gains on equity funds, the net impact on the CAGR yield is less than 10%. Compared to other asset classes, mutual funds are more tax efficient since they are structured as capital gains funds with indexation benefits for long-term gains.

Investing in mutual funds naturally fits into your long term financial goals because of tenure matching. You can get an overnight 1-day debt fund to 20-year equity fund and just peg them to your goals. The risk of maturity mismatch will also be reduced in your long term financial plan this way.

When investing in equity and debt funds, you have the option of a systematic investment plan. Particularly when you want to build wealth for the long haul, SIPs provide great value because you don’t have to worry about timing the markets. Over a period of time, it reduces the average cost of holding.

For an investor, equity funds are just passive investments but can produce tremendous wealth over the long run. That is perhaps the most important reason to hold them in your financial plan. The discipline of SIP can generate substantial wealth for equity funds even with conservative returns.

This table illustrates the power of compounding: the longer you save, the more your principal earns returns, and the more your returns earn even more returns.

Defining your long term goals and assigning a value to them is one of the advantages of financial planning. You can then start a SIP based on realistic return assumptions. Give it a specific name to indicate that it is tied to a specific goal. That’ll simplify your entire planning process.

It is important to make equities work in your favour when planning for your retirement. Furthermore, you should ensure that these funds are invested in the form of a systematic withdrawal plan (SWP) upon retirement so that you will be able to take advantage of both the withdrawal market and the debt market. It is also possible to choose a mutual fund retirement plan directly.

In order to manage your child’s education expenses, you must invest aggressively in equity and plan milestone payments. Both of these can be managed through mutual funds by shifting equity funds to debt or liquid funds through STPs. In addition, you can opt for child planning funds directly. It is, however, advisable to manage your insurance and investment needs separately.