I am 28 years old and can invest Rs 20,000 per month. I want to build an investment corpus for the downpayment of my house in the next six years and also for my retirement. Where should I invest? I have often heard financial planners suggesting that one should increase investments as income increases. How is it possible as inflation keeps increasing as well? Should one increase investments on the expense of daily needs?
You have raised a very valid point on the difficulties faced due to rising expenses and when you hear from your friends and family to “save more”, you don’t know what to do.
To be realistic and fair, the expenses do not increase in the same proportion as the increase in income. And at your age, when you don’t have many responsibilities, it is much easier for you to increase your investment. Hence, any increase in income over expenses should be invested to achieve your financial goals.
The idea is not to reduce your daily expenses to increase your savings. However, you need to be prudent enough to determine if any expenses can be brought down.
As far as savings are concerned, you have a horizon of six years to build a corpus for the downpayment of your house. For the other part of the savings—for retirement—the horizon becomes much longer and hence the asset allocation can be distributed accordingly.
The corpus that you need for the house can be invested in monthly income plans (MIP), balanced funds and debt funds. In MIPs, the debt component is 70-80% and the balance is equity; the endeavour is to give stable returns over a period of time and is meant for investors with marginal appetite for equity risk. The same is recommended as marginal exposure to equity over the long term can pay off well. Also, you can consider balanced funds where the exposure to equities is 65% and more. These funds are recommended as the horizon is six years and you can consider equities as the vehicle to ride you through these years. However, a word of caution—equities do carry the risk of capital. And the reason of recommending the same is that you have a long tenor. Also, if equities don’t do well in six years, when you have to buy your house, you can always defer your decision by a year. If it gives you exponential gains over the next few years, you should consider moving the balanced funds to MIP or debt funds.
For your retirement corpus, you should surely look at equities. Equities over long term tend to outperform any other asset class.
For debt funds consider dynamic asset class and long-term fixed maturity plans (FMPs). In the MIP space, funds like Reliance MIP, HDFC MIP are good options. Balanced funds like HDFC Prudence and HDFC Balanced have been consistent performers.
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Surya Bhatia is a certified financial planner and principal consultant, Asset Managers.