Fixed deposits, recurring deposits, public provident fund, mutual funds, and endowment insurance policies are the most popular investment options for any person, who is looking to invest a fixed sum of money on a monthly basis.
For instance, let's plan investment for an individual, between the ages of 25-30 years, looking to invest Rs 10,000 per month out of his monthly income towards his retirement goal. He plans to retire at age 50.
This means, he has a long investment time frame and has good number of compounding years available in this situation. He has a high risk taking ability. A person, who understands the risk associated with investing in equity, should ideally choose a portfolio mix of at least 80 per cent in equity or growth assets. Growth assets mean the assets that have an ability to earn 14-15 per cent return year-over-year (YOY). Over a longer time horizon and the balance 20 per cent can be invested in debt/fixed income investments, by choosing this kind of an investment mix for monthly investment of Rs 10,000, with a disciplined investment for the next 25 years. A corpus of close to Rs 2.65 crore can be created with a return assumption of 14 per cent y-o-y.
In other case, a person who has medium risk taking ability with a similar time frame should ideally choose an investment mix of 50-60 per cent in equity/growth assets. The balance in debt/fixed income assets, with this kind of an investment mix with a disciplined monthly investment over next 25 years, can help him create a corpus close to Rs 1.87 crore, with a return assumption of 12 per cent y-o-y. A person with a low risk taking ability in the same situation should not ideally invest more than 30 per cent of his investible surplus in equity/growth asset. The balance should be invested in debt/fixed income assets to protect the capital as downside will pinch such a personality more than a potential upside of a portfolio.
A person looking at investing fixed sum of money every month towards his medium term financial goals, this means the goals which are 3-5 years away even with a high risk ability, should not invest more than 40 per cent of his investible surplus in equity/growth assets. The balance should ideally go in debt assets only as equity investments are prone to volatility over a shorter time frame. In the same situation, a person with a moderate to low risk taking ability should restrict himself to maximum 20 per cent allocation in equity and balance should go to debt assets only.
Hence, a person, before making any investment decision, should always first know his time frame of investing. That means whether the investment is for long term, medium term or for any short term financial goals and his ideal risk taking ability. By having clarity on the above-mentioned aspects, one can make rational investment decisions.
The writer is Partner Financial Planning, TBNG Capital Advisors.