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Is making 1 crore in 5 years possible with low income and a young child?

Ramalingam Kalirajan |7290 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 14, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Oct 13, 2024Hindi

I have 0 bank emi with class 3 studying son. Take home 1.5l How could i make 1cr in next 5 years?

Ans: You want to accumulate Rs 1 crore in the next 5 years. With a take-home salary of Rs 1.5 lakh and no bank EMIs, your current financial situation is conducive to aggressive investing. However, achieving this goal within 5 years requires a well-structured plan with calculated risks and disciplined savings.

The right mix of investments will be necessary. You may need to allocate funds in different asset classes like mutual funds, fixed deposits, and gold to ensure both growth and stability. Let's discuss how you can achieve this goal with an appropriate approach.

Importance of Regular Savings and Investment Discipline
To accumulate Rs 1 crore in 5 years, you need to save and invest systematically. Start by calculating how much of your monthly income can be allocated towards your goal. Given that you take home Rs 1.5 lakh, ideally, you should be saving a significant portion of this.

Aim to save at least 30%–40% of your monthly income, which comes to about Rs 45,000 to Rs 60,000.

Create a separate corpus for your son’s education, and keep it aside for long-term investments. You can allocate the rest towards your Rs 1 crore goal.

With consistent investments in the right instruments, your savings will multiply over time through compounding.

Focusing on the Right Investment Strategy
To reach Rs 1 crore in 5 years, your focus should be on growth-oriented investments. Fixed deposits and traditional savings won't give you the required returns. Instead, a diversified portfolio with a strong emphasis on equity mutual funds and some exposure to fixed-income assets would be ideal. Below is how you can plan it:

1. Equity Mutual Funds
Equity mutual funds have the potential to deliver high returns over time. Given your time frame of 5 years, you should focus on growth and value-oriented funds that can deliver returns in the range of 10% to 15% annually. Investing in flexicap, midcap, and large-cap funds will offer both growth and risk management.

Allocate at least 60% to 70% of your monthly savings to equity mutual funds. These funds will help grow your wealth faster than debt-oriented instruments.

Actively managed funds are recommended because they aim to beat the market and take advantage of market opportunities.

2. Debt Mutual Funds
While equity provides higher returns, it also comes with risk. Debt mutual funds offer stability and moderate returns, and they help protect your investments during market volatility.

Allocate 15% to 20% of your savings to debt mutual funds for lower-risk investments.

Opt for short-duration or dynamic bond funds, which align with your 5-year horizon. These funds will provide better liquidity and steady returns.

3. Hybrid Mutual Funds
Hybrid funds, also known as balanced funds, offer a combination of equity and debt in a single portfolio. They provide better risk management while still offering good returns.

Allocate 10% to 15% of your savings in hybrid funds. This will diversify your portfolio while maintaining a growth component.
4. Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds offer an additional layer of safety and diversification to your portfolio. They provide an interest income along with potential price appreciation in gold.

You can invest around 5% to 10% of your savings in SGBs to add a hedge against inflation and market volatility.
5. Emergency Fund
It’s important to maintain an emergency fund equal to 6–12 months of your monthly expenses. This ensures that you won’t need to touch your investments in case of an emergency.

Keep this fund in liquid investments, such as a bank fixed deposit or liquid mutual fund.
Systematic Investment Plan (SIP) for Consistency
Systematic Investment Plans (SIP) help you invest a fixed amount regularly in mutual funds. This method promotes disciplined investing and takes advantage of rupee-cost averaging, which helps mitigate market risks over time.

Set up SIPs in the equity, debt, and hybrid mutual funds you choose. Ensure the combined SIP amounts reflect your monthly savings target (e.g., Rs 60,000 monthly).

Over time, the SIP approach will help you stay consistent and work towards your Rs 1 crore goal without timing the market.

Regularly Reviewing and Rebalancing the Portfolio
Once you have started your investments, regular reviews are essential. The market can change, and so can the performance of your chosen funds.

Review the performance of your portfolio every 6 months or annually to ensure that it’s aligned with your goal.

Rebalance your portfolio to maintain the right asset allocation. For instance, if your equity allocation has grown significantly, consider reallocating some funds to debt for safety.

Focus on Tax-Efficient Investing
When investing for long-term goals, understanding taxation is important. Here’s a quick look at the tax rules applicable to mutual funds:

For equity mutual funds, long-term capital gains (LTCG) exceeding Rs 1.25 lakh in a financial year are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%.

For debt mutual funds, both LTCG and STCG are taxed as per your income tax slab.

Opt for tax-efficient funds, such as equity-linked savings schemes (ELSS), which offer tax benefits under Section 80C of the Income Tax Act, up to Rs 1.5 lakh per annum.

Avoid Common Mistakes
Many investors make mistakes that can impact their financial goals. Here are a few to avoid:

Avoid Direct Funds: While direct mutual fund plans have lower expense ratios, they require constant monitoring and expertise. It’s better to invest through a Certified Financial Planner (CFP) who can guide you and help select the right funds.

Avoid Frequent Switching of Funds: Constantly switching between funds based on short-term performance can be harmful. Stick to a well-thought-out plan and allow your investments to grow.

Don’t Rely on Index Funds: Actively managed mutual funds are better suited for your goal. They aim to outperform the market and generate higher returns than index funds, which only track the market's performance.

Managing Risk and Staying Patient
Investing always comes with some degree of risk, especially in equity funds. However, the key to wealth accumulation is managing that risk by:

Diversifying across assets: Having a mix of equity, debt, and gold will balance your portfolio and lower risk.

Staying patient: Equity investments can be volatile, but long-term investors benefit from staying the course and allowing compounding to work.

Plan for Your Son’s Future
Your son is currently in class 3, and as he grows, his education expenses will increase. It’s wise to plan a separate education fund, possibly through SIPs in a child education fund or a balanced fund, so that you’re not caught off guard when significant expenses arise.

Set aside a portion of your monthly income specifically for his education.
Finally
Accumulating Rs 1 crore in 5 years requires careful planning, disciplined savings, and the right mix of investments. By focusing on growth-oriented equity mutual funds, balancing with debt instruments, and following a consistent investment strategy, you will be able to meet your financial goal. Remember, patience and regular monitoring are key.

It’s also important to plan for your child’s education and build an emergency fund to protect against any unforeseen events. With a holistic approach, you will be able to secure both your short-term and long-term financial goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment

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