My husband will be moving to the US for a 3-year project in April next year and I will be joining him by the beginning of 2018. I am currently working and earn Rs.70,000 a month. Once I move to the US, I will be unemployed for some time. How should I use this time till I move to make the most of my investments? I currently invest Rs.15,000 in mutual funds through systematic investment plans (SIPs), and around Rs.50,000 annually in my Public Provident Fund (PPF) account. My total monthly expenses come up to Rs.40,000. I am 31 years old, and we do not have any children at the moment.
You have a good 18 months in which you can optimise your savings. Let us first ascertain your potential to save. With a monthly income of Rs.70,000 and expenses of Rs.40,000, you have a clear potential to save of up to Rs.30,000 per month. However, currently you are saving only Rs.15,000 a month, and an additional approximately Rs.4,000 in PPF—a total savings of Rs.19,000 per month. This still leaves you with an additional potential saving of Rs.11,000 per month.
A total monthly saving of Rs.30,000 for a period of 18 months will give you a principal corpus of Rs.5.4 lakh. The income that can be earned on this corpus will be based on the asset allocation of the portfolio.
Logically, at your age and assuming that this corpus can be invested for the long term, you should be considering equity as an asset class for investments. Equity offers superior returns over long periods but comes with volatility. Hence, the key is to ensure long-term investment as well as consider your risk appetite. Risk appetite broadly defines the risk which you can take.
For example, your reaction to equity investments in case markets correct by 20% within six months of making the investment, when the investment made is planned for the long-term, will define your risk appetite. Similarly, you can use many templates or questionnaires which will help in defining your risk profile. So, if you can manage volatility, then consider equity. Monthly SIPs in mutual funds is a good option to create wealth over the long term. You can distribute your assets across various categories of funds, i.e., large-cap, multi-cap, mid-cap and even hybrid schemes.
If we assume a period of five years, the expected return of equity as an asset class should be around 12-13%. At the higher rate of 13%, the corpus after 18 months should be Rs.6 lakh. And with no additional savings, another three years will take your corpus to Rs.8.65 lakh. If you want to have a lower equity exposure, then the expected rate of earnings would come down accordingly.
The key here is to beat inflation and to ensure that the portfolio returns are over and above the inflation rate. To do this you need to have an asset class that has the potential to beat inflation, and equity is surely one such asset class.
Queries and views at firstname.lastname@example.org