Photo: iStock
Photo: iStock

Go for long-term multi-cap mutual fund investment in your 20s

At the same time, if you need tax saving for the complete amount being invested, then it can be increased in one mutual fund only

I am 25 years old and earn 32,500 per month. I have a term insurance of 1 crore and medical insurance with a sum insured of 15 lakh, and a critical illness plan. I pay a total premium of 22,660 for these policies. I have monthly SIPs of 500 each in L&T Midcap Fund Direct-Growth, Reliance Small Cap Fund Direct-Growth and Axis Long Term Equity Direct Plan-Growth, besides 1,000 per month in Aditya Birla Sun Life Tax Relief 96 Direct-Growth. These are for a two-year period, ending July 2020, after which I plan to go for higher studies and plan to take an education loan for that. I am not looking to fund my studies from my SIPs. These are either for the future or to bring down the principal of the education loan once I start repaying it after I get a job. I would like to start reinvesting from August 2021. Currently, I spend 27,000, including all expenses and investments. Can you help me with a plan?— Aishwary Kumar Tiwari

You are on the right track. You have started your financial planning well by getting yourself insured. While you have got yourself a term Insurance along with medical and critical illness covers, you have gone and covered yourself for a very high sum assured considering your age as well as financial responsibility. This puts pressure on your finances. You also plan to go on education leave for a year starting 2020. However, as it will be a one-year leave and you plan to come back to work in 2021, assuming at a higher salary, you may as well continue with the cover given that you also plan to take an education loan thereby giving it an insurance back up. Typically a life insurance should be 7-8 times your annual income after adjusting your loans. This can be considered for your future enhancement of sum assured.

For investments, you have picked up four funds—two are mid-cap and small-cap funds and the remaining are equity-linked savings schemes (ELSS) meant for tax saving. As you intend to hold the investment for long term and considering your age, you can continue with the mid-cap and small-cap funds. While both your ELSS funds are good, it is recommended to have one fund in this category and add a multi-cap fund in the portfolio for further diversification. At the same time, if you need tax saving for the complete amount being done right now, then it can be increased in one fund only. 

Further, your total current investments is 2, 500 per month which is less than 8% of the income, and even if we add the insurances, the insurances and investment rate combined together comes to 13.50%. The rate of savings prima facie appears to be low and you should be aware of the same. It is possible that you are on top of it but cannot bring down the expenses. You should be aware that if there’s any possibility to increase the savings rate, you should do that.

ALSO READ | Financial planning in your 20s: Put a process in place early to reap long-term benefits

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Surya Bhatia is managing partner of Asset Managers. Queries and views at mintmoney@livemint.com

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