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31-Year-Old Husband-to-Be Seeks Path to 5-Crore Retirement Corpus

Ramalingam Kalirajan |8093 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 15, 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

Question by Vijayan on Jul 15, 2024Hindi

Hi, I am 31 years old male married and planning for Children in the next 2 years, I am Planning to retire at 40. I have a Monthly Salary of 2lks from an active profession, I also have a small food business which makes a turnover of 3lks per month with 8-10% margin. I have a liability of 30lks(home loan)+ 25lks(Plot loan)+ 8lks(car loan), Assets : 2.5CR worth real-estate portfolio(includes 3 rental properties) 10lks in FD, 4lks in PPF, 40lks in Direct stocks and 65lks in mutual funds(SIP of 45K/Month). I would like to retire comfortably with a liquid corpus of 5Cr(annual SWP of 4%) how should I go about on collecting this corpus? Should I Step up my midcap/small cap exposure in Direct stocks as well as mutual funds?

Ans: First of all, congratulations on your upcoming plans and the progress you’ve already made. Planning for retirement at 40 is ambitious but achievable with the right strategy. You have a clear goal: a liquid corpus of Rs. 5 crore to generate a steady income through a Systematic Withdrawal Plan (SWP) at 4% annually.

Let’s break down your current financial situation and devise a strategy to achieve this goal.

Current Financial Snapshot

You have a diversified portfolio, including real estate, fixed deposits, Public Provident Fund (PPF), direct stocks, and mutual funds. Your salary and food business provide a stable income, but you also carry significant liabilities.

Your current assets and liabilities are:

Monthly Salary: Rs. 2 lakhs
Food Business Turnover: Rs. 3 lakhs per month (with 8-10% margin)
Home Loan: Rs. 30 lakhs
Plot Loan: Rs. 25 lakhs
Car Loan: Rs. 8 lakhs
Real Estate Portfolio: Rs. 2.5 crore
Fixed Deposit (FD): Rs. 10 lakhs
Public Provident Fund (PPF): Rs. 4 lakhs
Direct Stocks: Rs. 40 lakhs
Mutual Funds: Rs. 65 lakhs (SIP of Rs. 45,000 per month)
Setting Clear Financial Objectives

Before delving into investment strategies, it’s crucial to outline your financial objectives:

Retire at 40: Accumulate Rs. 5 crore in liquid assets.
Annual SWP of 4%: Ensure a stable retirement income.
Managing Liabilities: Efficiently handle existing loans.
Investment Strategy: Diversification and Growth

1. Mutual Funds and Direct Stocks

To achieve your Rs. 5 crore corpus, focusing on equity investments is essential due to their potential for higher returns. However, balancing between mid-cap, small-cap, and large-cap funds is crucial for risk management.

Mid-cap and Small-cap Exposure:

Increasing your exposure to mid-cap and small-cap funds can potentially yield higher returns. These funds invest in companies with high growth potential. However, they also come with higher risk compared to large-cap funds.

Benefits of Actively Managed Funds:

Actively managed funds have the advantage of professional management. Fund managers actively select stocks to outperform the market. This can be beneficial, especially in mid-cap and small-cap segments where market inefficiencies can be exploited.

Regular Funds vs. Direct Funds:

Investing through a Certified Financial Planner (CFP) can provide you with professional guidance. Regular funds, as opposed to direct funds, come with advisory benefits which can be crucial for making informed investment decisions. The additional cost of regular funds is often justified by the value of expert advice.

2. Fixed Deposits and PPF

Your current holdings in FD and PPF are safe but offer lower returns. Given your risk tolerance and the time frame, consider rebalancing a portion of these into higher-yielding equity investments.

3. Real Estate Investments

While real estate can provide rental income and potential appreciation, it’s less liquid compared to equities and mutual funds. Given your goal of a liquid corpus, focusing on more liquid assets is advisable.

Maximizing Your Savings and Investments

1. Systematic Investment Plan (SIP)

Continue your SIPs and consider stepping them up. Increasing your SIPs in mutual funds, particularly in diversified equity funds, can accelerate your corpus accumulation.

2. Reducing Debt

Prioritize reducing high-interest debts. Clearing your car loan and home loan faster can save you significant interest costs. Allocate a portion of your monthly income towards prepaying these loans.

3. Emergency Fund

Maintaining an emergency fund is crucial. Ensure it covers at least 6-12 months of your expenses. This provides a safety net without the need to liquidate your investments prematurely.

Risk Management and Contingency Planning

1. Insurance Coverage

Ensure you have adequate life and health insurance. This protects your family’s financial future in case of unforeseen events.

2. Diversification

Diversification reduces risk. While increasing your equity exposure, ensure you’re diversified across sectors and market capitalizations. This mitigates the impact of market volatility.

3. Regular Review and Rebalancing

Regularly review your portfolio with your CFP. Rebalance as needed to stay aligned with your risk tolerance and financial goals. Market conditions and personal circumstances change, so periodic adjustments are essential.

Tax Efficiency

1. Equity Investments

Equity investments held for more than a year qualify for long-term capital gains tax, which is lower than short-term gains. This tax efficiency enhances your overall returns.

2. Tax-saving Instruments

Continue investing in tax-saving instruments like PPF, ELSS (Equity-Linked Savings Scheme), and others. These not only provide tax benefits but also contribute to your corpus.

Achieving the Rs. 5 Crore Corpus

Based on your current investments and assuming an average annual return of 10-12% from equity investments, let’s outline a strategy:

1. Step Up SIPs

Increasing your SIPs can significantly boost your corpus. A disciplined approach to SIPs in diversified equity funds will compound your wealth over time.

2. Regular Lump Sum Investments

Utilize any windfall gains or bonuses to make lump sum investments in equity mutual funds. This can accelerate your corpus accumulation.

3. Focus on Growth

Allocate a higher proportion of your portfolio to mid-cap and small-cap funds. These funds have higher growth potential, albeit with higher risk. Balancing this with large-cap funds can provide stability.

4. Monitor and Adjust

Regularly monitor your investments and adjust as needed. Market conditions and your financial situation will evolve, requiring periodic rebalancing.

Appreciation and Empathy

Your commitment to planning your financial future is commendable. Balancing professional and personal responsibilities while planning for early retirement is no small feat. Your current strategy already demonstrates financial prudence and foresight.

Final Insights

Achieving a liquid corpus of Rs. 5 crore by the age of 40 requires a strategic approach focusing on high-growth investments, debt reduction, and regular monitoring. By stepping up your equity exposure, especially in mid-cap and small-cap segments, and maintaining a disciplined SIP strategy, you can reach your financial goals.

Remember, a Certified Financial Planner can provide personalized advice tailored to your specific needs and risk tolerance. Regular reviews and adjustments to your plan will ensure you stay on track to achieve a comfortable and financially secure retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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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