I am 25-year-old. I want to begin investing for two major goals in my life -- to buy a house and my retirement. My risk profile is moderate. I am okay with investing in small caps as well. Details of my two goals are as below:
1. Buy a house in the next six years: I want to accumulate Rs 2 crore to buy my house. If needed, I may take a home loan for any amount over and above Rs 2 crore. I may be open to extending the timeframe to eight to 10 years, as well.
2. Retirement at 50: I wish to save Rs 3 crore for my golden days in the next 25 years.
How much money should I invest? Which mutual funds should I invest in? Are my goals achievable in the given timeline?
- Abishek Jaiswal
By Prateek Mehta, Co-Founder and CBO, Scripbox
First of all, I must commend the fact that you are looking at long-term goals at the right stage of your life. The longer horizon on goals will help you benefit from the compounding effect on wealth, while also letting you realise many other aspirations that you may have. Given your age and stage of life, long-term equity investing would be most suitable for you to achieve your financial goals.
Goal 1: Buying a house
For your first goal of buying a house, if completing this in six years is an absolute priority, then you should mix the corpus with a home loan. Assuming the cost of furnishing and fittings of 10 per cent over the target of 2 crore, your required corpus will go to 2.2 crore. In order to accumulate 20 per cent of this amount as your equity for your home, the target amount needs to be around 45 lakh. Looking at an eight year window and assuming a higher return of 10 per cent post-tax from a portfolio with asset mix in favour of equity, you will need to invest Rs 25,000 monthly in a diversified portfolio of large cap and mid cap funds.
Be sure to increase this yearly by 5 per cent as your income goes up. If you are willing to extend the goal to buy a house by 2 years, then the monthly investment amount can come down to Rs 21,000 in the starting year, assuming that you still do a yearly step up of 5 per cent in the monthly investment amount. That is, if you start investing 21,000 monthly in Year 1, take it to Rs 22,050 in Year 2 and so on.
Goal 2: Retirement planning
For your other financial goal of a Rs 3-crore retirement nest, you will need a monthly inflow of less than Rs 1 lakh, adjusted for inflation at 6 per cent till 90 years. With this in mind, you should invest Rs 23,500 every month till the age of 50 in order to create a corpus of Rs 3.75 crore that can meet your monthly expenses of Rs 1 lakh during retirement, post-inflation. For this goal, you should dedicate 100 per cent into equity mutual funds, and gradually bring it down to 30 per cent by the time you reach 50 year age. This 30 per cent can be carried to your retirement phase and be further reduced to 0 per cent at the age of 70, i.e., shift entirely to debt/fixed income at that age.
If you can increase your monthly investment every year by 5 per cent, your monthly investment amount in Year 1 can come down to Rs 15,000. So your Year 1 monthly SIP will be Rs 15,000, Year 2 will be Rs 15,750 and so on. Another way of looking at this is to consider extending your retirement age to 55. If you do that, your starting monthly SIP can come down drastically to Rs 8,400, which you can continue to increase at 5 per cent on a yearly basis. You can also accelerate your allocations to retirement once your home loan is paid off and get to your retirement target sooner.
Where to invest?
Investing in the right funds and right categories is also extremely important. Ideally, you should allocate 80 per cent of your equity investments to large cap, while the remaining can go to mid cap funds. While small cap funds may seem interesting at times, they go through significant volatility. You can possibly skip them at this stage of your investment journey.
Over time, you may prioritise other financial commitments that would need to be added to your wealth management plan. Finally, you should consult a financial advisor who could help you select the right kind of funds and also periodically review your investments.
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