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Data Science Student Worried About Recession & Placement, Asks Investment Advice for Comfortable Retirement

Ramalingam Kalirajan |6275 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 22, 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 - Jun 21, 2024Hindi

Hello, I'm 22 year old student, in final year of BE in computer science and aiming to become data scientist. I'm in a tier 3 college and due to recession not sure about placement and if got placed than what will be the package. Currently I do some online problem solving and earn 3k-5k per month and let's assume that I got placed with 6 lacs per annum package. For upcoming few year I may not have to send money to my parents and I hardly waste any money. So I would like to get some investment advise for retirement at the age of arround 55 with enough corpus to spend 1 lacs per month of today's date. If possible please provide advice if not than what path should I take to achieve this goal.

Ans: Young and Early Start: At 22, you’re at an excellent stage to start planning for your future. Starting early gives you the advantage of compounding. This means your investments can grow significantly over time, even if you begin with small amounts.

Education and Career Uncertainty: You're about to complete your BE in Computer Science from a Tier 3 college. Although you're unsure about placements due to the current recession, your skills in online problem-solving suggest you have a good foundation.

Potential Income: If you get a job with a package of Rs 6 lakhs per annum, your monthly income would be around Rs 50,000 before taxes. This gives you a solid base to start investing, considering your minimal expenses and no need to send money to your parents.

Setting a Retirement Goal
Retirement at 55: You aim to retire at 55, which gives you around 33 years to build your retirement corpus. Planning to spend Rs 1 lakh per month in today’s terms means you’ll need to account for inflation. This is a challenging but achievable goal with disciplined investing.

Target Corpus: To spend Rs 1 lakh per month in retirement, you’ll need a substantial corpus. This amount will need to grow with inflation. The target corpus will depend on inflation rates over the next 33 years.

Initial Steps for Investment
Start with a SIP: A Systematic Investment Plan (SIP) is an excellent way to start investing regularly. You can begin with small amounts and gradually increase your investment as your income grows.

Focus on Equity Funds: Given your long investment horizon, equity mutual funds should be the primary focus. Equity funds have the potential to deliver higher returns over the long term compared to other asset classes.

Avoid Index Funds: Index funds might seem attractive due to lower costs, but they merely mimic market indices. Actively managed funds, guided by skilled fund managers, can potentially outperform the market. This could lead to higher returns, especially over such a long investment horizon.

Consider Regular Funds: While direct mutual funds offer lower expense ratios, regular funds can be beneficial for someone just starting. Investing through a Certified Financial Planner (CFP) allows you to receive professional guidance, ensuring that your investments are aligned with your long-term goals.

Building a Diversified Portfolio
Equity Diversification: Spread your investments across different equity mutual funds, focusing on large-cap, mid-cap, and small-cap funds. This diversification reduces risk while capturing growth from various market segments.

Debt Funds for Stability: Although you are young, it’s still wise to allocate a small portion to debt funds. Debt funds provide stability to your portfolio and reduce overall risk.

Gold as a Hedge: Consider a small allocation to gold, either through mutual funds or Sovereign Gold Bonds. Gold acts as a hedge against inflation and market volatility.

Reviewing and Adjusting
Regular Reviews: Your financial situation and goals may change over time. Regularly review your investment portfolio and make adjustments as needed. This ensures that your investments remain aligned with your goals.

Increase SIPs Gradually: As your income increases, gradually increase your SIP amounts. This helps in accelerating your corpus growth without putting a strain on your finances.

Emergency Fund: Before aggressively investing, ensure you have an emergency fund. This fund should cover at least six months of expenses. It provides a safety net in case of unforeseen events, ensuring you don’t have to dip into your investments.

Planning for Inflation and Future Expenses
Inflation Impact: Inflation will erode the purchasing power of your money over time. To ensure your Rs 1 lakh monthly goal in retirement is sufficient, your investments must outpace inflation. Equity investments are crucial here as they have historically outperformed inflation.

Healthcare and Insurance: As you grow older, healthcare will become a significant expense. Consider health insurance as part of your financial planning. It ensures you’re covered without having to deplete your retirement corpus.

Tax Planning: As your income grows, tax planning becomes essential. Use tax-saving mutual funds and other instruments to reduce your tax liability, thereby increasing your net savings and investments.

Final Insights
Start Early and Stay Consistent: The key to achieving your retirement goal is starting early and being consistent with your investments. Regular contributions, even small ones, will grow significantly over time due to compounding.

Avoid High-Risk Investments: While it might be tempting to chase high returns with risky investments, it’s better to stick to a diversified portfolio. This reduces the risk of losing your hard-earned money and ensures steady growth over time.

Engage a Certified Financial Planner: As you progress in your career, consider engaging a Certified Financial Planner (CFP). A CFP can provide personalized advice, helping you navigate complex financial decisions and stay on track to meet your retirement goals.

Stay Focused on Long-Term Goals: While short-term market fluctuations can be concerning, your focus should remain on your long-term goals. The market has historically rewarded disciplined, long-term investors with substantial growth.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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