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Should I invest 1.5 lakhs monthly in SIPs, ETFs, and US stocks for long-term growth?

Ramalingam

Ramalingam Kalirajan  |8191 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 04, 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 - Nov 03, 2024Hindi
Money

Sir , 1.5lakh monthly SIP divided in large mid and small cap. Rest 50k in ETFs and US stocks. Is it a good strategy in long term ,10-15year? Thankyou

Ans: Your commitment to a structured investment plan reflects foresight, and it's commendable that you've outlined a mix of asset classes. Let's break down each part of your strategy and provide insights on optimising for a 10-15-year horizon.

1. SIP Allocation Across Large, Mid, and Small Cap Funds
Investing Rs 1.5 lakh monthly in a diversified mix of large, mid, and small-cap funds can be a productive approach. This diversified allocation has several benefits:

Growth Potential: Mid and small-cap funds provide the opportunity for higher growth compared to large-cap funds. With a long-term horizon, you have time to weather any short-term volatility.

Stability from Large Caps: Large-cap funds add stability. They tend to be less volatile than mid and small caps, which helps maintain balance within your portfolio.

Balanced Returns: By spreading your SIPs across these categories, you’re hedging risk while maximizing growth potential. Each category performs differently depending on market conditions, so a mixed approach balances returns.

2. Disadvantages of ETFs in a Long-Term Portfolio
Although ETFs can be attractive, they may not be ideal for a long-term, goal-oriented investment strategy. Here’s why:

Lack of Active Management: ETFs mirror an index and lack active management. This can limit performance during economic shifts as they can’t adapt to market changes or take advantage of specific opportunities like actively managed funds.

No Downside Protection: With ETFs, you follow the market's highs and lows directly, which may expose your portfolio to greater risks. Actively managed funds can provide better downside protection.

Tax Implications: ETFs also incur capital gains tax, which reduces returns, especially for investors in higher tax brackets. Actively managed funds may offer tax-efficiency options.

3. Direct Investments in US Stocks and Long-Term Viability
Investing in US stocks can bring geographic diversification and exposure to sectors not as prevalent in India. However, a few considerations are crucial:

Currency Exchange Risk: Returns can be impacted by fluctuations in exchange rates. Rupee depreciation could enhance returns, while appreciation could reduce them.

Economic Conditions: Economic shifts in the US affect the performance of these stocks. Being mindful of global trends is essential.

Taxation on US Stocks: Gains from US stock investments attract foreign tax implications. These tax rules differ from domestic investments, and understanding them is necessary to avoid surprises.

Importance of Using Regular Mutual Funds Over Direct Plans
While direct plans may seem appealing due to lower costs, investing through a Certified Financial Planner (CFP) using regular funds offers several advantages:

Professional Guidance: With a CFP, you gain access to expert insights on asset allocation and market trends. This guidance can align your investments with changing life stages and goals.

Regular Reviews: The financial landscape shifts regularly. With regular plans managed through a CFP, your portfolio is monitored and adjusted as needed. This oversight optimises your returns over time.

Focused Strategy: A CFP can help align your investment mix according to your unique financial goals. Direct plans place the full responsibility on you, which can be challenging without extensive knowledge.

Reviewing Your Investment Strategy Annually
An annual review of your investments with a Certified Financial Planner can add substantial value to your portfolio:

Rebalancing Portfolio: Market performance varies across asset classes. Regularly rebalancing your portfolio ensures you maintain the desired allocation in line with your goals.

Capitalising on Market Trends: A CFP can identify new opportunities or areas of risk, allowing you to make timely adjustments to your strategy.

Adjusting to Life Changes: Major life events can impact your financial goals. By reviewing your plan annually, you ensure it aligns with any new financial commitments or lifestyle changes.

Tax Implications for Equity and Debt Funds
Understanding the tax structure is key in maximising your returns. Here’s how capital gains taxation works:

Equity Mutual Funds: Long-term capital gains (LTCG) over Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%.

Debt Mutual Funds: LTCG and STCG are taxed as per your income tax slab. Knowing the tax implications will help you choose investments more tax-efficiently for long-term growth.

Emergency and Contingency Planning
It’s essential to maintain an emergency fund alongside your investments:

Contingency Fund: This fund should ideally cover 6-12 months’ expenses. Keep it in liquid assets for easy access during unforeseen events.

Medical and Health Planning: Unexpected medical costs can strain your portfolio. Consider separate investments or health insurance to cover medical expenses.

Final Insights
Your investment approach, focused on a diversified SIP with exposure to different markets, is a strong foundation. By ensuring an annual review with a Certified Financial Planner, you can keep your portfolio aligned with your goals, account for changing market dynamics, and mitigate risks. Remember, staying disciplined and adaptable in your strategy will help you reach your long-term objectives.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8191 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 25, 2024

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Im 32 year old working with a companty. I ve started two sips ( 5000 each from May 2024) both in Small Cap ( Nippon Small Cap and Tata Ethical Fund . Is this correct way to do inveor i need diversification.
Ans: Current Investment Overview

You are 32 years old and working with a company. You have started two SIPs of Rs. 5,000 each, both in small cap funds: Nippon Small Cap and Tata Ethical Fund, since May 2024. It's great that you have taken the initiative to invest regularly through SIPs.

Need for Diversification

Investing in small cap funds can offer high returns but also comes with higher risk. It's important to diversify your investments to reduce risk and achieve more balanced growth. Here's why and how you can diversify:

1. Diversification Benefits

Risk Reduction: Diversification helps spread risk across different asset classes.

Balanced Growth: Different types of funds perform well at different times. Diversification ensures you benefit from various market conditions.

Stability: A diversified portfolio provides more stability and consistent returns over the long term.

2. Suggested Diversification Strategy

To achieve diversification, consider adding funds from different categories:

Large Cap Funds

Why: Large cap funds invest in well-established companies. They offer more stability and lower risk compared to small cap funds.

Suggested Allocation: Allocate around 30-40% of your monthly investment to large cap funds.

Mid Cap Funds

Why: Mid cap funds invest in medium-sized companies. They provide a balance between the high growth potential of small caps and the stability of large caps.

Suggested Allocation: Allocate around 20-30% of your monthly investment to mid cap funds.

Multi Cap or Flexi Cap Funds

Why: These funds invest across large, mid, and small cap stocks, providing diversification within the equity segment.

Suggested Allocation: Allocate around 20-30% of your monthly investment to multi cap or flexi cap funds.

Debt Funds

Why: Debt funds offer stability and regular income. They reduce the overall risk of your portfolio.

Suggested Allocation: Allocate around 10-20% of your monthly investment to debt funds.

3. Reviewing Your Portfolio

Regularly review and rebalance your portfolio to ensure it aligns with your financial goals and market conditions. Consulting a Certified Financial Planner (CFP) can help you optimize your investment strategy.

Final Insights

Your current investment in small cap funds shows a willingness to take on higher risk for potential high returns. However, it's important to diversify your portfolio to achieve balanced growth and reduce risk. Add large cap, mid cap, multi cap, and debt funds to your investment mix. This will provide stability and help you achieve your financial goals more effectively.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

..Read more

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Ramalingam Kalirajan  |8191 Answers  |Ask -

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Hi sir thnku in advance. I am 28M,working in central govt job. It has just been one year and I plan on retiring very early around a 35 years of age. I have nps tier 1 account due to the job. I just have one query since I don't plan on marrying and I am alone with my own home. My expenses are max 18k per month. I hardly travel and live a very frugal life. So my query if I resign at 35 years then will 50 lakhs will sustain me for 15 years keeping in mind the inflation and my return as 7% on an average.
Ans: Your question shows rare clarity at a young age. You are just 28. But you already have a defined vision to retire by 35. That is highly appreciable. Many at this age are still unsure of financial direction.

Let us now assess your question in detail.

You asked whether Rs 50 lakhs will last 15 years, post retirement at 35.

Let us evaluate your financial journey from all angles.

Understanding Your Present Situation

You work in a central government job. That offers job security. And also an NPS Tier 1 account.

You live frugally. Your monthly expense is only Rs 18,000. That is extremely disciplined.

You have your own home. So no rent or EMI outgo. This reduces your future cost burden.

You do not plan to marry. So your financial responsibilities are only for yourself.

You plan to retire at 35. That means only 7 more years of active income.

After 35, you want Rs 50 lakhs corpus to sustain you for 15 years.

That means till age 50, you want to live from this corpus.

Now let us move step-by-step to assess sustainability.

Assessing Expense Inflation Over Time

Right now, your expense is Rs 18,000 per month.

Even a frugal person cannot avoid inflation.

Prices of food, electricity, health, etc. will go up.

Inflation over 15 years cannot be ignored.

Even if inflation is modest, say 6%, your expense will rise gradually.

By year 10 or 15, your Rs 18,000 monthly expense may double.

That will need a higher withdrawal from your corpus.

So corpus sustainability depends on how inflation is planned for.

Evaluating Return Assumption

You assume 7% average return on corpus.

This is realistic if money is well invested.

You must avoid only FDs or savings accounts.

To get 7% post-tax, proper asset allocation is needed.

Mutual funds can help here.

Especially, actively managed funds with a Certified Financial Planner.

Avoid index funds. They just copy the index.

Index funds do not give downside protection in bear markets.

They also underperform during volatile sideways markets.

Index funds have no fund manager taking active decisions.

Whereas actively managed funds adapt to market cycles.

A qualified CFP can help select suitable active funds.

Regular plans through a CFP give ongoing guidance.

Direct funds may look cheaper, but lack this support.

Direct funds are like self-medication. Risky without expert view.

Regular plans have a small fee, but offer long-term peace.

Corpus Withdrawal Planning

Your Rs 50 lakh must support monthly cash flow.

Even if you start withdrawing Rs 18,000 monthly, over time it will increase.

You need a withdrawal strategy.

You can follow a staggered withdrawal.

That means only taking what is needed each year.

Rest of the money keeps earning.

It also helps reduce tax burden.

But you must track how much you withdraw each year.

And ensure it grows in line with inflation.

If not planned well, corpus may finish earlier.

So withdrawal plan should be dynamic, not fixed.

A Certified Financial Planner can help prepare such a roadmap.

Emergency and Health Preparedness

You are alone. That means no support system in emergencies.

You must keep some contingency fund aside.

At least 12 months of expenses, i.e., about Rs 2.5 lakhs.

This should be liquid. Like in sweep-in FDs or ultra-short debt funds.

Also, ensure you have a strong health insurance policy.

Healthcare cost rises faster than inflation.

Even a single surgery or hospitalisation can dent your corpus.

Do not rely on employer health cover post resignation.

Buy your own health insurance before retirement.

Choose Rs 20–30 lakh cover. Preferably with a super top-up.

Keep paying its premium from a separate health corpus if needed.

If you stay healthy and insurance unused, that is a blessing.

But if not, it will safeguard your financial independence.

Psychological Readiness for Early Retirement

Financial numbers are only part of the journey.

Are you ready for non-financial changes post-retirement?

How will you keep yourself engaged from age 35 to 50?

No daily job, no team, no deadlines. That may feel strange.

Mental health and social belonging are also essential.

Plan for what you will do post retirement.

Hobbies, part-time work, teaching, or creative work.

Something that gives meaning to your day.

Else early retirement may feel empty after some years.

Personal fulfilment is important, not just financial planning.

Tax Implication of Your Investments

Returns from equity mutual funds have a new rule.

Long-term capital gain (LTCG) above Rs 1.25 lakh taxed at 12.5%.

Short-term gains (STCG) are taxed at 20%.

This affects how you redeem funds.

Withdraw strategically to reduce tax.

Do not withdraw large amounts in one go unless needed.

Spread withdrawals over financial years.

Plan investments so equity and debt are balanced.

This helps with tax and market stability.

NPS Tier 1 – How It Helps

You already have NPS Tier 1 account.

You can continue it even after quitting job.

But withdrawals are restricted before age 60.

You can withdraw only 20% before 60 if not annuitised.

So it may not be useful for your 35–50 needs.

But it can be your backup after 60.

So continue it. Don’t touch now.

Let it grow. It adds to your retirement safety.

It cannot be your main retirement plan for early years.

How You Should Build Rs 50 Lakh Corpus

You have 7 years left to save.

That is a short horizon for such a big goal.

You must save aggressively now.

Keep lifestyle minimal, as you already are doing.

Avoid unnecessary gadgets, dining, or gadgets.

Every rupee saved now compounds for your future.

Invest in a well-planned mutual fund portfolio.

Include large cap, mid cap, and flexi cap funds.

Avoid thematic or sectoral funds. Too risky for main corpus.

Also add short-duration debt funds for stability.

Review this plan once a year with your CFP.

Increase SIPs with each salary hike.

Also allocate your yearly bonus fully into investments.

Rs 50 lakh target is tough but possible with discipline.

Asset Allocation Approach

Corpus should not be 100% in equity or 100% in debt.

A balanced approach is better.

Early years of retirement can bear some equity.

Later years should gradually shift to debt.

This is called glide path strategy.

Helps avoid sequence of returns risk.

If market crashes in year 1 or 2, your corpus shrinks fast.

So first 3 years’ expenses should be in debt.

Remaining in equity-debt mix as per risk profile.

Rebalancing is important each year.

Do not ignore this step.

It controls risk and improves return consistency.

Finally

Rs 50 lakhs can last for 15 years if:

You invest it wisely.

Withdraw in a disciplined way.

Factor in inflation, taxes, and health cost.

Keep emergency corpus aside.

Stay insured for health and critical illness.

Engage yourself meaningfully post-retirement.

Review your plan annually with a Certified Financial Planner.

Early retirement is not a one-time plan.

It is a living strategy that needs updates.

You are on the right path.

Stay focused. Stay simple.

And always seek guidance when needed.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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