Use any savings from income to invest in PPF and other debt investments. This ‘safe’ portion of your portfolio, protects against equity market swings. Borrowing and investing in property is a great way to create wealth for people with the regular income to service such loans.
I am 31. I have a two-and-a-half-year-old daughter. My wife also earns and our collective monthly income is Rs 1.35 lakh. My goals are to build a corpus of Rs 1 crore for my daughter's education in the next 16 years and Rs 3 crore for my retirement (at 60).
I would also like to buy a house in the next three years which may cost me Rs 50 lakh.
I have been investing Rs 2,500 each in three MFs via the SIP route for the past two years: HDFC Top 200, DSP BR Top 100 Equity Reg- Growth and Birla SunLife Frontline Equity-Growth.
I want to invest more. I am planning to increase my investment in HDFC Top 200 and DSP by Rs 2,500 each to make them Rs 5,000 each.
I am also planning to invest Rs 2,500 per month in IDFC Premier Equity Fund.
I also invest Rs 1 lakh per year in PPF and have been investing in PPF for the past three years. I have a life insurance term policy of Rs 1 crore.
Sreekanth Paladugu
As you are starting out so early, you are quite comfortably placed to meet the goals you have laid out. We suggest you approach your different objectives as follows.
HOME BY 2015
We advocate that you take a home loan in order to fund your home purchase of Rs 50 lakh in three years.
Given the low interest rates and tax benefits that are available on home loans in India, borrowing and investing in property is a great way to create wealth for people with the regular income to service such loans.
This is especially true when inflation is expected to be high.
Now, a Rs 50-lakh property will require a down payment of at least Rs 5 lakh (10 per cent of value).
Towards this, we suggest you use the accumulated balance of equity funds that you have already invested in and part of your Public Provident Fund (PPF) investments, which will complete six years by 2014.
A rough calculation shows that you currently have equity fund investments worth about Rs 2.1 lakh as a result of your systematic investment plans (SIPs).
Assuming modest returns of 10 per cent annually on this over the next three years, this may grow to about Rs 3 lakh by 2015.
You can meet the remaining Rs 1.5 lakh of down payment by withdrawing from your PPF account and investing Rs 50,000 in cash.
A home loan for Rs 45 lakh for 20 years at 10.75 per cent will entail an EMI outgo of Rs 46,000/month.
DAUGHTER’S EDUCATION
A sum of Rs 1 crore seems to be on the higher side to fund education. However, if you are keen on accumulating this sum, you will need to invest Rs 17,000 a month via SIPs, preferably in balanced funds or in a combination of equity and debt funds.
On an assumed return of 12 per cent per annum, this will help you reach a sum of Rs 97 lakh at the end of 16 years. You can do this by continuing with your current SIPs and adding a debt fund, preferably a dynamic bond fund.
Alternatively, you can also use balanced funds such as HDFC Balanced, DSP BlackRock Balanced and CanRobeco Balanced for this purpose. They invest 60 per cent or more in equities and the rest in debt instruments.
RETIREMENT CORPUS
Because you have 29 years to go before retirement, your retirement target of Rs 3 crore can be reached by investing Rs 5,000 every month in SIPs of equity funds.
We suggest you spread this across two funds — IDFC Premier Equity and Goldman Sachs S&P 500 Fund.
Of your current monthly income of Rs 1,35,000, the above mutual fund investments will take up Rs 22,000 and the EMI may take up about Rs 46,000.
That leaves you with a monthly surplus of Rs 67,000 to create an emergency fund, invest in health insurance and meet living expenses.
We presume your income will grow at least at the inflation rate over the years. You can use any savings from your income to invest in PPF and other debt investments. This can be the ‘safe’ portion of your portfolio, which protects you against equity market swings.
Given that your investments are going to be really long-term, don’t forget to review your funds every year and replace under-performers.
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