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As you get closer to your goals, move from equity to debt

LiveMint logoLiveMint 26-05-2014 Surya Bhatia

I plan to invest around `20,000 a month in mutual funds (MFs). My goals include child’s education (time frame: 12-15 years) and retirement (time frame: 20-25 years). I have investments in Public Provident Fund (PPF) and National Pension System (NPS), where I put `3,000 a month each. I also have money in Employees’ Provident Fund (EPF). How can I achieve my goals?


Your primary objective for saving is to plan for your child’s education and retirement. The good part is that both these goals are long term. The key is to save regularly and consistently. If you can target to increase savings along with the inflation rate or with increase in income every year, it will add to the corpus. What is not defined here is the amount you are looking at. Once you have these numbers, you can work backwards to determine how much your savings should be to achieve these goals. To give you a brief on actual numbers, if you save regularly for 12 years with savings fixed at `20,000 per month, the accumulated principal will be `28.80 lakh. Adding interest at a rate of 10%, the corpus will be at least `50 lakh. However, you also need to factor in inflation as the cost of education will go up. And that’s why you need to increase savings, preferably every year, to match inflation. Assuming you are able to increase your savings by 5% every year, the total principal value will become `38.20 lakh and at the same interest rate of 10%, the corpus will become `64 lakh. This assumes importance as you also need to save for retirement.

You already have savings in PPF, NPS along with EPF, which are predominantly secured debt investments, except for NPS, where there can be equity exposure albeit a little restricted. It is advisable if you consider equity exposure for your savings; the primary reason being that your financial needs are long term. You need to ensure that earnings are higher than the inflation rate. At the same time, you should be ready to take the risk which comes with equity investment, i.e. you need to judge your risk appetite and capacity. As you come closer to your goals, start moving from equity to debt.

As you will be saving on a monthly basis, start doing systematic investment plans in MFs. Identify schemes across asset classes. Pick schemes from each category. In the large-cap category, ICICI Prudential Focused Bluechip is a good option. In multi-cap, Birla Sun Life Frontline Equity and ICICI Prudential Dynamic are consistent performers. Among mid-cap schemes, HDFC Mid Cap Opportunities and Mirae Asset Emerging Bluechip can be considered. HDFC Balanced Fund and ICICI Prudential Balanced Advantage are steady hybrid funds.

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