Avoid high exposure to risky assets for short-term goals
I am 22 and have just started working. I want to plan for my higher studies abroad after 4 years. Where should I invest so that I can save up to Rs.10-15 lakh to cover my expenses? I plan to take an education loan, and at the same time will apply for scholarships. I earn Rs.40,000 a month and my total expenses are Rs.18,000.
It is good you are serious about your future and want to create a corpus for your higher education.
Currently, you have the potential to save Rs.22,000 per month. Assuming you can continue to save this amount for the next four years, the total principal amount accumulated is Rs.10.56 lakh. Do keep in mind that here interest rate is the variable factor. This will depend on the asset allocation, i.e., portfolio mix spread across various asset classes. Typically, debt assets can generate a return equal to inflation rate, of let us say 8%, and for equity assets we can consider an average return of 13% over a four-year period for the time being. Being volatile in nature, equity asset class can generate even more or less, and that is why we call it a volatile asset class. The deciding factor to create the allocation will be your risk appetite, which will determine how much risk can be taken. At the same time, the need of corpus in four years should also be kept in mind.
If you are conservative or want to be conservative, then invest in 100% debt securities, with a targeted return of 8%. The net worth after four years will be Rs.12.48 lakh. As a moderate investor, you may consider capping equity exposure at 30% and the remaining 70% can be invested in debt assets. The targeted return then becomes 9.50% resulting in a net worth of Rs.12.89 lakh. Asset allocation of 50% each will generate an average return of 10.50%, and you will be classified as a medium-risk investor. The net worth here becomes Rs.13.17 lakh.
You can create any combination of asset allocation but high exposure to equity, i.e. risk, may not be recommended as you have a financial need to be fulfilled in four years. Only if you are flexible enough and can push this need beyond four years should you consider taking higher exposure to risk.
Further, in the above calculations, we have not considered any increase in your income (and net taxation). An annual increase in income will enable higher savings.
The investments can be started via systematic investment plans on a monthly basis. The debt portfolio can be a combination of short-term mutual funds, and recurring deposits. And the equity portfolio can be a mix of mutual funds—large-cap, multi-cap and balanced funds.
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