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27-Year-Old Earning 1 Lakh Monthly: Am I Investing Enough?

Ramalingam

Ramalingam Kalirajan  |6978 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 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
Asked by Anonymous - Oct 15, 2024Hindi
Money

Hi sir , I have a monthly salary of 1L per month,Iam 27 years old. I want to understand whether iam over investing or under investing as i already secured with health insurance for self and parents and term life for myself. With addition to pf , I started ppf and nps both 5k each and mutual funds with 8k per month. My pf monthly deduction is around 6k.

Ans: You are 27 years old, earning Rs. 1 lakh per month, and have made good strides toward securing your financial future. You’ve already taken the right steps by securing health insurance for yourself and your parents, as well as a term life insurance plan. Along with your investments in PPF, NPS, and mutual funds, you’re on the right track. However, it's important to assess whether you're overinvesting or underinvesting based on your financial goals, expenses, and savings potential.

Let’s take a comprehensive look at your current financial scenario and provide insights into whether your investments are aligned with your future needs.

Investment Overview and Breakdown
Based on the information you've provided, here's a summary of your current investments:

Provident Fund (PF): Rs. 6,000 per month
Public Provident Fund (PPF): Rs. 5,000 per month
National Pension System (NPS): Rs. 5,000 per month
Mutual Funds: Rs. 8,000 per month
Total Monthly Investments: Rs. 24,000
You’re currently investing 24% of your monthly income (Rs. 1 lakh) into these schemes. This is a solid saving percentage, particularly for your age. Typically, financial planners recommend saving at least 20-30% of your income, so you're within a good range.

However, let's dig deeper to see if you are over-investing or under-investing based on your goals, expenses, and risk profile.

Evaluating Your Current Investment Mix
1. Provident Fund (PF):

Your PF deduction is Rs. 6,000 per month, which helps in building a solid retirement corpus. It also offers tax benefits under Section 80C.

Insight: PF is a safe and long-term wealth-building tool. Since it’s mandatory and part of your salary structure, it continues without requiring active management from you.
2. Public Provident Fund (PPF):

You are investing Rs. 5,000 per month in PPF. This is another excellent long-term investment vehicle with a lock-in of 15 years.

Insight: PPF offers tax-free returns and is considered a very safe investment. However, its liquidity is limited due to the long lock-in period, which may restrict your access to funds in case of emergencies.
3. National Pension System (NPS):

You’ve also committed Rs. 5,000 per month to NPS, which is a pension scheme that helps build a retirement corpus with some equity exposure.

Insight: NPS is a good addition to your retirement plan, as it offers market-linked returns with tax benefits. However, keep in mind that a portion of your retirement corpus will be locked in for purchasing annuities upon maturity.
4. Mutual Funds:

Your investment in mutual funds is Rs. 8,000 per month. Since this is market-linked, it adds an element of growth to your portfolio.

Insight: Mutual funds can help you build wealth over the long term, especially if you diversify into different types like large-cap, mid-cap, and small-cap funds. Actively managed mutual funds provide you with opportunities to outperform the market when handled by a Certified Financial Planner through regular funds. Avoid index funds and direct funds, as they limit active management advantages.
Assessing Your Risk Profile and Investment Allocation
Since you're 27 years old, you have a high risk-taking ability. Younger investors can typically afford to allocate more funds toward equity-based investments to maximize long-term growth.

Equity Exposure: Your mutual fund investments (Rs. 8,000 per month) provide equity exposure, but it only constitutes 33% of your total monthly investment. You may want to consider increasing this allocation, especially since equities have the potential for higher returns in the long run.

Debt Exposure: Your investments in PF, PPF, and NPS are all relatively safe debt instruments. They offer stability and security but are generally lower in returns compared to equity.

Balancing Your Investments: Are You Over or Under-Investing?
1. Over-Investing or Under-Investing?

You are currently investing Rs. 24,000 per month, which is 24% of your income. This is a healthy saving rate. You are not over-investing, as you are balancing both equity and debt instruments.

The key question is whether you have sufficient funds left for your monthly expenses and lifestyle needs. Ensure that your day-to-day expenses, emergency fund, and any upcoming goals (such as travel or buying a car) are also considered.

2. Emergency Fund:

While you’ve made smart investments, it’s equally important to have an emergency fund. This fund should cover 6-12 months of your expenses. Based on your salary, aim to have around Rs. 2-3 lakh in liquid assets like a savings account or liquid mutual funds. If you haven't started this yet, it’s advisable to set aside some money for emergencies.

3. Long-Term Goals:

It’s important to clarify your long-term financial goals. Whether it’s buying a home, planning for marriage, or retirement, these goals will determine whether your current investment mix is appropriate.

For Retirement: Your PF, PPF, and NPS will contribute toward your retirement, but you should ensure your equity investments (through mutual funds) grow as well.

Other Goals: For mid-term goals (5-10 years), such as buying a house or car, ensure you are not overly invested in long-term lock-in schemes like PPF and NPS. Keep some flexibility in your portfolio.

Is Your Investment Mix Optimal?
Your current investments are well-diversified between safe, government-backed schemes like PPF and NPS, and market-linked instruments like mutual funds. However, there are a few areas where adjustments may be beneficial.

1. Increase Equity Exposure:

Since you are 27, consider allocating more funds to equity-based mutual funds. You could increase your mutual fund SIPs from Rs. 8,000 to Rs. 12,000 or even Rs. 15,000. This will give your portfolio a better growth potential over the long term.
2. Tax Planning:

You’re already maximizing Section 80C benefits with your PF, PPF, and NPS contributions. If needed, you can increase your NPS contribution to take advantage of Section 80CCD(1B), which provides an additional Rs. 50,000 tax deduction.
3. Avoid Direct Funds and Index Funds:

As mentioned earlier, direct funds limit the advantage of professional management. Investing through a Certified Financial Planner (CFP) in regular funds gives you access to expert insights and active management. This can lead to better long-term returns.

Index funds, while low cost, tend to mirror the market. Actively managed funds, on the other hand, offer the potential to outperform the market and should be preferred for long-term growth.

Final Insights
At 27, you’re on the right track with your investments. You are neither over-investing nor under-investing. Your current savings rate is commendable, but there’s room to adjust your portfolio to maximize returns.

Increase Equity Exposure: Consider increasing your mutual fund SIPs to give your portfolio more growth potential.

Maintain an Emergency Fund: Ensure you have liquidity to cover 6-12 months of expenses for emergencies.

Tax Efficiency: Review your NPS contributions to maximize tax benefits under Section 80CCD(1B).

Avoid Index Funds and Direct Funds: Focus on actively managed funds through a trusted Certified Financial Planner for better performance.

By making these adjustments, you’ll build a more robust, well-balanced portfolio that supports your long-term financial goals.

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  |6978 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 13, 2024

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dear sir, i m 54 years old male and having investment in MF of 58 lacks of current value of 1 Cr above.also having PF Fund 24 lacs,super enuation 16 lacs and 7 to 8 lacs in NPS. my monthly salary on hand 1.8 lacks. every month invest 75k in MF and 12k in NPS. after retirement i should have monthly 1 lac for my expense. kindly suggest how much should i invest every month. i have two daughters and got marries and no liability on my head.
Ans: You have done an excellent job in building your financial portfolio. With Rs 1 crore in mutual funds, Rs 24 lakhs in Provident Fund (PF), Rs 16 lakhs in superannuation, and Rs 7-8 lakhs in NPS, you have a strong financial base. Your monthly salary of Rs 1.8 lakhs and current investments of Rs 75,000 in mutual funds and Rs 12,000 in NPS show a disciplined approach to saving for retirement.

You mentioned that you will require Rs 1 lakh per month after retirement. This is an important goal and will guide our investment strategy.

Assessing Your Retirement Income Needs
To ensure that you have Rs 1 lakh per month during retirement, we need to consider various factors. Your existing corpus will need to generate sufficient income to meet your monthly expenses without depleting the principal too quickly.

Assuming you retire at 60, you have six more years to build your retirement corpus. The challenge is to ensure that your investments grow sufficiently to provide you with a steady income of Rs 1 lakh per month. Given your current investment discipline, you are on the right path, but a few adjustments could optimize your strategy.

Investment Strategy for Mutual Funds
Reviewing Your Mutual Fund Portfolio:

Your current mutual fund portfolio of Rs 1 crore indicates good growth over time.

However, it’s essential to review the performance of these funds regularly.

Focus on funds with a proven track record and actively managed funds. These funds offer potential for higher returns than index funds.

Ensure that your portfolio is diversified across various asset classes like large-cap, mid-cap, and multi-cap funds.

SIP vs Lump Sum:

Continue with your monthly SIP of Rs 75,000 in mutual funds. This systematic approach will help you average out market volatility.

If you receive any lump sum amounts, such as bonuses or incentives, consider investing them in a staggered manner.

Debt Fund Allocation:

As you approach retirement, consider increasing your allocation to debt funds. Debt funds offer stability and can help preserve your capital.

A gradual shift towards a balanced portfolio with a higher debt component will reduce your exposure to market risks.

Optimizing Your NPS Contributions
Your monthly contribution of Rs 12,000 to NPS is a wise choice. NPS offers a mix of equity and debt, making it a balanced investment for retirement.

Consider reviewing your NPS allocation to ensure it aligns with your risk appetite.

You can opt for a more conservative approach as you near retirement, reducing equity exposure and increasing debt allocation.

Superannuation and Provident Fund Planning
Your superannuation of Rs 16 lakhs and PF of Rs 24 lakhs are excellent sources of retirement income.

Upon retirement, you can consider withdrawing a portion of these funds for immediate needs.

The remaining amount can be invested in a mix of debt instruments and hybrid mutual funds to generate regular income.

Consider options that offer both growth and income, ensuring that your principal remains intact.

Calculating Your Monthly Investments
To achieve Rs 1 lakh per month after retirement, we need to estimate the required corpus. Although exact calculations depend on various assumptions, your current investment pattern suggests that you may need to increase your monthly contributions slightly.

Estimating Future Corpus:

Considering inflation and future expenses, you might need a retirement corpus of around Rs 2-3 crores.

To reach this target, continue with your current SIPs and consider increasing your monthly investment by Rs 10,000-15,000.

You can distribute this additional investment across debt funds, equity funds, and NPS, ensuring a balanced portfolio.

Creating a Retirement Income Strategy
Systematic Withdrawal Plan (SWP):

Upon retirement, consider setting up a Systematic Withdrawal Plan (SWP) from your mutual funds. SWP allows you to withdraw a fixed amount regularly, providing a steady income.

SWPs are tax-efficient and help manage your cash flow.

Hybrid Funds:

Invest in hybrid mutual funds that combine equity and debt. These funds offer growth potential while reducing risk.

Hybrid funds can be part of your retirement income strategy, providing a balanced approach.

Debt Instruments:

Allocate a portion of your retirement corpus to debt instruments like fixed deposits, government bonds, or Senior Citizen Savings Schemes (SCSS).

These options provide fixed returns and ensure capital preservation.

Managing Risk and Ensuring Growth
Regular Portfolio Review:

Review your portfolio at least once a year with the help of a Certified Financial Planner. This will ensure that your investments remain aligned with your retirement goals.

Rebalance your portfolio as needed, especially if there are significant changes in market conditions or your financial situation.

Contingency Planning:

Keep a contingency fund in place, equivalent to at least 6-12 months of expenses. This fund should be easily accessible and can be in liquid funds or savings accounts.

The contingency fund ensures that you don’t need to withdraw from your investments in case of emergencies.

Final Insights
Your disciplined approach to saving and investing has put you in a strong position as you approach retirement. By making some strategic adjustments, you can ensure that you achieve your goal of Rs 1 lakh per month in retirement.

Continue with your SIPs and NPS contributions, but consider increasing your monthly investment slightly.

Diversify your portfolio, with a gradual shift towards more conservative investments as you near retirement.

Set up a Systematic Withdrawal Plan (SWP) to manage your retirement income efficiently.

Regularly review and rebalance your portfolio to stay on track.

By following these steps, you can enjoy a comfortable retirement with the financial security you desire.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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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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