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SIP is an excellent long-term investment option for equity investors who want to build up a sizable corpus. SIP investments are proven to generate higher returns than traditional investments like gold, fixed deposit, PPF etc. There is no thumb rule or fixed time that can be used to determine whether to make mutual fund investments, but financial experts believe that if you are a working professional with a long-term investment horizon of at least five years and have the appetite to bear market-based risks, then mutual fund SIPs could be the best option. But let us assume a scenario here.

Scenario: I am 28 years old and can invest in a mutual fund with a moderate risk appetite. I need 5 crore for child education and another 5 crore for a house in 10 years. Please advise how much I should invest monthly via SIP and which funds to create this corpus.

Based on the above scenario, CA Manish P. Hingar, Founder of Fintoo said “As you are a young investor and have mentioned that you are a moderate risk taker, it is suggested to invest in a couple of Equity Mutual funds to meet your goal. Assuming 10 crores is your goal in current terms, after adjusting it for inflation at 7% for 10 years, the amount required would be around 20 crores on completion of 10 years. A total of 9 lacs of monthly SIP will be required to reach both goals. You can start two SIPs of 3 lacs each in Equity Large Cap Funds. Assuming a 10% CAGR from a conservative perspective, this will help you accumulate close to 12.4 crores. It is further suggested to have some exposure to Mid-caps and small caps."

He further added that “A SIP of 1.4 lacs in an Equity Mid Cap fund assuming 12% CAGR for 10 years will help you accumulate around 3.2 crores. In addition to this, another SIP of 1.6 lacs in an Equity Small Cap fund is recommended to accumulate the remaining 4.4 crores with an assumption of 15% p.a. CAGR. The above allocation is suggested assuming you will have some debt investment exposure for your short to medium-term goals. Some of the best performing Large Cap funds are Quant Focussed Fund, ICICI Prudential Bluechip Fund, HDFC Index Fund -S&P BSE Sensex Plan and Canara Robeco Bluechip Equity Fund. In Mid Cap Category, Axis Mid Cap Fund and Kotak Emerging Equity Fund are among the best-performing funds. For Small Cap Funds, Edelweiss Small Cap fund and Canara Robeco Small Cap Fund are suggested for a 10-year period."

Nitin Rao, Head Products and Proposition, Epsilon Money Mart said “SIP is a good investment tool for a long-term investor to accumulate a large corpus. Volatility pertaining to equity also goes down as the tenure increases. While starting early is a sure-shot way to accumulate a large sum, other ways like a step-up SIP can also come in handy. For a normal investor, looking for fair returns @ 12% and 5% annual inflation, approx 2,00,000 would be needed monthly for the goals of 10 crore corpus in 20 years. While it might intimidate new & small investors, starting with even smaller sums in a disciplined way helps."

Considering the scenario taken as an example here in the topic, Nitin Rao said “Having said that, we can't ignore inflation. Meaning, the current requirement of 10 crore will become much more owing to depreciation in the monetary value. Therefore, our current calculation takes a 5% inflation rate & 12% annual return. Since you need money in 10 years of time, you should start a SIP worth 5,85,000 approximately to get the required sum. Kindly understand that the amount might seem large, but the returns generated will be inflation-adjusted therefore, you can rest assured that at the time of need, there is no shortfall. Just to add, if you increase your tenure by just 5 years, you will achieve your goals by investing only 3,22,000 per month. Such is the power of compounding."

Niraj Bora Founder of Surmount Business Advisors Pvt Ltd said "I am considering a few assumptions for the investment plan to reach the targeted wealth.

1. Assuming 15% Returns on the overall Mutual funds, and entire investments as well. This is considered in line with past returns given to investors in past decades.

2. Investment period is considered 20 years, in which monthly investments are considered, like SIP model.

3. Starting investment considered is INR 35,000 per month, which should work for someone with 1.5 lacs salary (own, spouse included) a month and increasing at 10% per annum.

“Considering these parameters above, a corpus of 10cr can be targeted at the end of 20 years. Market fluctuations can have some temporary impact on the overall portfolio, but the same can be evened out during the boom period, over this 20 years of holding period," said Niraj Bora.

“Balancing of the investment can be done in growth (blue chips and others), hybrid (debt and equity mix) and debt funds as well. Ideally, the ratio of debt has to be not more than 20% of the overall portfolio size. A thumb rule accepted in the market is (100- your age) is the mix of equity recommended for the portfolio. Someone with the age of 30 can have 70% in the equity portfolio and the rest in mixed or debt securities," said Niraj Bora.

“I would personally recommend the equity mix (non-blue chip) portion as well. Typically these are a bit riskier than blue chips but have a higher return over a longer period. Investors are recommended to read and study the basics of the fund they are invested in. Companies like small cases and others also have a variety of mixed portfolios wherein the funds can be allocated for better returns. However, the recommendation is to go for blue chips 60-70% of the equity portfolio, and the rest in non-blue chip growth within the equity portfolio," Niraj Bora stated.

"This can ensure returns above 15% as well if the market performs well enough. Considering that this portfolio gets compounding benefits on a pre-tax basis, the tax for these is applicable at the end of the period or withdrawal period. That’s why the overall tax rate/impact is quite low and is factored in the said returns," he claimed.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

ABOUT THE AUTHOR

Vipul Das

Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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