Photo: iStock
Photo: iStock

Power of compounding can accelerate the growth rate in mutual fund investments

  • As small saving done consistently over a long period of time accumulates in large corpus
  • You need monthly saving of close to 13, 000 to achieve both the targets, assuming average returns of 12%

I am 22 years old. I need 10-15 lakh to buy a car in 10 years and 25-30 lakh to buy a house in 15 years. Can you guide me how I can allocate my funds via SIP and in which mutual funds I should invest in?

—Omprakash Hanwant

It is good that you are planning your long-term goals at such an early age. It really helps as small saving done consistently over a long period of time accumulates in large corpus. What also helps over long term is the power of compounding where you earn interest on interest thereby accelerating the growth rate. You have mentioned two goals—buying a car and a house. Both are long-term goals to be achieved in 10 and 15 years respectively. Considering your age, you can invest in equity asset class via mutual funds. You need monthly saving of close to 13, 000 to achieve both the targets, assuming average returns of 12%. This is when no increase in monthly savings is considered over such period and no loan is considered for both the car as well as the house. Also, inflation has not been factored in the workings.

Within equity, you can pick a combination of large-cap (Axis Blue Chip fund), multi-cap (Kotak Standard Multi Cap), large- and mid-cap (Mirae Asset Emerging Blue Chip fund) and mid-cap fund (Franklin India Prima fund) which could be your investments via systematic investment plan route.

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

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