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25-Year-Old Earning 50k/Month: How to Allocate Mutual Funds?

Ramalingam Kalirajan |7873 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 23, 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 - Aug 22, 2024Hindi

Hello im 25 yrs old currently earning 50k per month and investing 10 k in large cap for the view of next 30 yrs , advice me to allocate my mutual funds properly and thinking to increase investment in midcap and small from next year from 10 k to total 25 k in all funds

Ans: You’re currently investing Rs. 10,000 per month in a large-cap mutual fund with a 30-year horizon. This is a commendable approach for wealth creation, as large-cap funds offer stability and consistent growth. However, given your long-term horizon, there’s room to diversify further to maximize returns.

You’re considering increasing your investment to Rs. 25,000 per month, including allocations to mid-cap and small-cap funds. This is a smart move, as it will add growth potential to your portfolio. Let’s evaluate and suggest a proper allocation.

Benefits of Diversifying Your Mutual Fund Portfolio
Stability with Large-Cap Funds: Large-cap funds form the foundation of your portfolio. These funds invest in established companies with a proven track record. They offer stability and moderate returns, which is crucial for long-term wealth building.

Growth Potential with Mid-Cap Funds: Mid-cap funds invest in companies with the potential to become tomorrow’s large caps. They offer a higher growth potential compared to large-cap funds. Including mid-cap funds will enhance your portfolio’s growth prospects over the next 30 years.

High Returns with Small-Cap Funds: Small-cap funds carry the highest risk but also the potential for the highest returns. These funds invest in smaller companies with the potential for exponential growth. Given your young age and long investment horizon, allocating a portion to small-cap funds could significantly boost your overall returns.

Suggested Allocation Strategy
With your plan to invest Rs. 25,000 per month, here’s a suggested allocation:

Large-Cap Funds (40%): Continue investing Rs. 10,000 per month in large-cap funds. This will maintain the stability of your portfolio while providing steady growth.

Mid-Cap Funds (35%): Allocate Rs. 8,750 per month to mid-cap funds. This will give your portfolio a balanced mix of stability and growth potential.

Small-Cap Funds (25%): Invest Rs. 6,250 per month in small-cap funds. This allocation provides exposure to high-growth opportunities while balancing risk.

Benefits of Increasing Your Investment
Compounding Effect: Increasing your investment from Rs. 10,000 to Rs. 25,000 per month will significantly enhance the power of compounding over 30 years. This is crucial for building a substantial corpus.

Risk Mitigation: By diversifying across large-cap, mid-cap, and small-cap funds, you mitigate the risks associated with market volatility. This diversified approach ensures that your portfolio can withstand market fluctuations while still growing steadily.

Long-Term Wealth Creation: A well-diversified portfolio, coupled with consistent investment, will help you achieve your financial goals. Over 30 years, this strategy can lead to substantial wealth creation, securing your financial future.

Monitoring and Rebalancing
It’s essential to monitor your portfolio regularly. Markets and personal circumstances change over time. You should review your investments at least once a year to ensure they are on track.

Annual Review: Conduct an annual review of your mutual fund portfolio. This will help you assess the performance and make necessary adjustments.

Rebalancing: Over time, certain funds may outperform others, leading to an imbalance in your portfolio. Rebalancing ensures that your portfolio stays aligned with your risk profile and long-term goals.

Considering SIP Top-Ups
You’re starting with Rs. 25,000 per month, but as your income grows, consider increasing your SIP amount. Many fund houses offer SIP top-up options, allowing you to increase your SIP amount periodically. This is a great way to ensure that your investments keep pace with your income growth.

Tax Efficiency and Planning
Equity Funds and Taxation: Long-term capital gains (LTCG) from equity mutual funds are taxed at 10% for gains exceeding Rs. 1 lakh in a financial year. Keep this in mind while planning your withdrawals.

Tax-Saving Funds: If you’re looking to save on taxes, you could consider allocating a small portion of your investment to Equity Linked Savings Schemes (ELSS). These funds offer tax benefits under Section 80C and have a mandatory lock-in period of three years.

Final Insights
You’re on the right path by planning to increase your investment and diversify your portfolio. By carefully allocating your SIPs across large-cap, mid-cap, and small-cap funds, you’re setting yourself up for long-term success. Regular monitoring, rebalancing, and considering SIP top-ups will help you stay on track and achieve your financial goals.

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.