Check safety, returns and liquidity before investing

While investing is a process, you can further improve the same by identifying your financial goals and making your investment centric to your financial needs


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I earn around Rs3 lakh per month. I plan to invest around Rs1 lakh a month for the next 8 years, so that I get around Rs80 lakh for my daughter’s higher education. Which financial instruments should I invest in? I also want to invest up to Rs50,000 for the next 15 years for my retirement. How should I invest?

—Rovish Sharma

It is important for us to invest and the earlier we start the better it is. This is mainly on account of two reasons. One, we save for a longer period and invest more amount of funds. The second reason—and it is critical—is the power of compounding, which really helps if the investment horizon is long.

While investing is a process, you can further improve the same by identifying your financial goals and making your investment centric to your financial needs. This streamlining will ensure that the investments are in synergy with financial goals.

There are three pillars to any investment: safety, returns and liquidity; and any investment to be made for any specific goal needs to be prioritised on these factors.

You are planning for your daughter’s education and want to save Rs 1 lakh per month for the next 8 years. The savings of Rs1 lakh per month for the next 8 years will create a principal corpus of Rs96 lakh. Assuming a return of 10%, the corpus will become Rs1.47 crore after 8 years. And at 11%, the corpus becomes Rs1.54 crore.

To determine the asset allocation, run the goal through the above matrix.

Safety gets the highest priority as this is a financial goal, which has to be achieved at any cost. Liquidity gets the least priority as the goal is to be achieved after 8 years. Return gets the medium priority. So the investment decision becomes a little easier as the process to achieve the same gets defined. Therefore, the equity exposure should not be higher than 50% of the total investments assigned to this goal of education corpus. Large-cap, multi-cap and balanced funds can be part of the equity portfolio. As liquidity is not a concern, debt portfolio with long- term horizon can be considered but with not more than 8 years maturity, so long-term debt mutual funds are a good option.

Likewise, you can plan for your retirement goal. Savings of Rs50,000 per month for the next 15 years will make principal savings of Rs90 lakh. Assuming a return of 10%, the corpus becomes Rs2.08 crore, and at an average return of 12%, the corpus becomes Rs2.52 crore. What you also need to take in consideration is the inflation. The amount post 15 years appears prima facie large enough but will it suffice depends on your monthly expenses post-retirement.

The asset allocation can again be determined by running the above financial matrix. Safety again gets the highest priority followed by return and the least priority is assigned to liquidity as the investment horizon is long term. Therefore, a portfolio mix of long-term debt funds along with equity assets with a composition of large-cap, multi-cap and mid-cap funds as well as balanced funds can form a part of your portfolio. Here, the equity allocation can be on a higher side as compared to the education goal as the investment horizon is much more.

Also, you need to check your risk profile albeit more on the risk appetite side to determine how much risk you should really take while allocating investments in equity assets.

And as you have a regular salary income, you should start monthly investment via systematic investment plans (SIPs), which also offer the additional advantage of bringing discipline.

Surya Bhatia is managing partner, Asset Managers.

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