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Ramalingam Kalirajan |7059 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 11, 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 04, 2024Hindi

Iam currently 26 years old,having salary of 1 lakh per month so I'm currently depositing in ppf,nps, insurance for both myself and parents ,term plan, so I'm secured hence I'm planning for early by 40 retirement with good Corpus of atleast 8-10crores which should fund my childrens education and further expenses too. Should this be ideal ??

Ans: First, I must say it's impressive that you’re planning for your future so thoughtfully at 26. Early planning is key to financial freedom, and your goal to retire by 40 with a corpus of Rs 8-10 crores is both ambitious and commendable. Let's dive into how you can achieve this in a well-rounded manner.

Your Current Financial Position
You’re earning Rs 1 lakh per month and investing in PPF, NPS, insurance for yourself and your parents, and a term plan. You’re already on a solid path, covering essential bases such as retirement planning, tax savings, and insurance.

Defining Your Goals
To retire by 40 with Rs 8-10 crores, you need to ensure your investments are growing sufficiently. This corpus will fund your living expenses and your children's education. Let's break this down step-by-step.

Strategic Investment Planning
Maximising Your Investments:

Public Provident Fund (PPF):
PPF is a safe investment with decent returns and tax benefits. However, its contribution limit and lower returns compared to other investment avenues might slow your growth. Continue PPF for the stability it offers, but diversify more aggressively elsewhere.

National Pension System (NPS):
NPS is good for retirement savings with tax benefits under Section 80C and 80CCD. It’s worth continuing for long-term growth and stability.

Insurance:
Having term insurance is crucial. It’s good you’re covered along with your parents. Ensure the sum assured is enough to cover potential future expenses.

Aggressive Growth Through Mutual Funds:

Given your long-term horizon, mutual funds are ideal. Let’s explore the benefits and categories of mutual funds in detail.

Mutual Funds: Categories and Benefits
Equity Funds:

Description:
Equity funds invest in stocks, providing higher returns but with higher risk. Suitable for long-term goals due to the power of compounding.

Advantages:
They offer potential high growth, ideal for achieving a corpus of Rs 8-10 crores in the long run.

Categories:

Large-Cap Funds:
Invest in well-established companies. They’re relatively stable with moderate returns.
Mid-Cap Funds:
Invest in medium-sized companies, offering a balance of risk and return.
Small-Cap Funds:
Invest in smaller companies, higher risk but higher potential returns.
Debt Funds:

Description:
Debt funds invest in fixed-income instruments like bonds. They provide stable but lower returns compared to equity funds.

Advantages:
Suitable for risk-averse investors. They provide regular income and are less volatile.

Hybrid Funds:

Description:
Hybrid funds combine equity and debt investments. They balance risk and reward, making them suitable for moderate-risk investors.

Advantages:
They offer diversification within a single fund, balancing growth and stability.

Power of Compounding
Understanding Compounding:

Description:
Compounding is earning returns on both your initial investment and the returns reinvested.

Impact:
Over long periods, compounding significantly boosts your investment growth. Starting early and staying invested is key.

Assessing Risks
Market Volatility:

Equity Funds:
Subject to market fluctuations, which can impact short-term returns but tend to even out over the long term.

Debt Funds:
More stable but can be affected by interest rate changes.

Diversification:

Mitigating Risk:
Spread your investments across various asset classes and fund types to reduce risk.
Direct vs. Regular Mutual Funds
Disadvantages of Direct Funds:

Time and Expertise:
Managing direct funds requires considerable time and investment knowledge.
Benefits of Regular Funds:

Professional Management:
Investing through a Certified Financial Planner (CFP) ensures professional advice, strategic planning, and better fund management.

Convenience:
CFPs handle the complexities, allowing you to focus on other priorities.

Insurance: Term Plans and ULIPs
Term Insurance:

Importance:
Provides financial security for your dependents in case of unforeseen events.

Adequate Coverage:
Ensure the sum assured is adequate to cover your family's needs.

Investment-cum-Insurance Policies (ULIPs):

Recommendation:
Consider surrendering ULIPs and reinvesting in mutual funds for better returns and flexibility.
Early Retirement Planning
Setting a Corpus Target:

Rs 8-10 Crores:
Assess your current savings, expected returns, and required monthly savings to reach this goal.
Investment Strategy:

Equity Focus:
Given your long horizon, a significant portion should be in equity funds for higher growth.

Regular Review:
Regularly review and adjust your portfolio to stay aligned with your goals.

Children's Education Fund
Separate Savings:

Dedicated Fund:
Create a separate fund for your children’s education. Use a mix of equity and debt funds for this purpose.

Systematic Investment Plan (SIP):
Start SIPs in mutual funds to regularly contribute towards this goal.

Final Insights
You’re on the right track with your investments and insurance. To achieve your goal of Rs 8-10 crores by 40, focus on diversifying your investments, especially into equity mutual funds for higher growth. Regularly review and adjust your portfolio. Consider consulting a Certified Financial Planner to optimise your investment strategy and ensure you’re on track to meet your financial goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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