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Ramalingam Kalirajan |7290 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 03, 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 Paras on Oct 02, 2024Hindi

Dear Sir, I am about to start a new investment journey. I am willing to invest around 1 lac rupees every month. I am looking for your guidance on "Where shall I invest this amount?" I will get good returns on 15 years of horizon. Shall I invest at one place only or diversify? What can be the options of investment? Thanks.. Regards Paras

Ans: Paras, I appreciate your clarity and long-term focus on investments. A 15-year horizon allows you to take advantage of the power of compounding and market growth. With Rs 1 lakh per month to invest, your financial discipline will pave the way for a strong financial future. Let’s evaluate how to best allocate your monthly investments and achieve good returns over this period.

Diversify Your Investments
It is important to diversify your investments rather than putting everything in one place. Diversification reduces risk and allows you to benefit from different asset classes. Over a 15-year horizon, your portfolio should have a balanced mix of equity for growth, debt for stability, and a small portion in other instruments for diversification.

Equity Mutual Funds for Growth
A large portion of your monthly Rs 1 lakh investment should go into equity mutual funds. Over 15 years, equity can deliver strong returns, outpacing inflation. Actively managed equity mutual funds are ideal for long-term goals as they aim to beat market indices through research-based stock selection. While index funds are passive and may not give superior returns, actively managed funds can provide the expertise needed to outperform.

Debt Mutual Funds for Stability
A portion of your investment should be in debt mutual funds to provide stability. Debt funds offer predictable returns and lower risk compared to equity. While equity is volatile, debt instruments like bonds in these funds provide a cushion against market fluctuations. They also offer liquidity, making them a good option if you need access to funds before the 15 years.

Balanced Allocation
Over the long term, you can consider a 70:30 equity-to-debt ratio. Seventy percent in equity will focus on growth, while 30% in debt funds will offer stability. However, this ratio can be adjusted as you approach the end of the 15 years to reduce exposure to risk.

Systematic Investment Plans (SIPs)
Consistency with SIPs
Systematic Investment Plans (SIPs) allow you to invest regularly in mutual funds. Since you plan to invest Rs 1 lakh each month, SIPs are the best way to ensure disciplined and systematic investments. They also help you average the cost of investments over time, especially in volatile markets.

Increasing Your SIP Amount Annually
You might want to consider increasing your SIP amount by 10% every year. As your income grows, increasing your SIP will help you invest more while maintaining the same financial discipline. This can significantly boost your corpus over time.

Avoid Concentration Risk
Avoid Overdependence on Any Single Asset Class
While equity mutual funds will form the backbone of your investment strategy, avoid putting all Rs 1 lakh solely in equity every month. This exposes you to concentration risk. A mix of equity and debt ensures that not all your investments are subject to market volatility.
Tax Efficiency of Your Investments
Understanding Taxation on Equity Mutual Funds
When you sell your equity mutual funds, the long-term capital gains (LTCG) above Rs 1.25 lakh will be taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%. These taxes will impact your overall returns, so plan your redemptions strategically to minimise taxes.

Debt Mutual Fund Taxation
For debt mutual funds, both LTCG and STCG are taxed as per your income tax slab. Keeping this in mind, limit redemptions from debt funds unless necessary. However, the tax-efficient nature of mutual funds compared to fixed deposits or other instruments is beneficial for long-term investors like yourself.

Avoid Real Estate as an Investment
Lack of Liquidity and Flexibility
While real estate is often seen as a safe investment, it lacks liquidity and flexibility compared to mutual funds. If you need to sell real estate to meet financial goals, the process can be time-consuming and involve significant costs.

High Maintenance Costs
Real estate requires maintenance, property taxes, and often loan interest payments, which can eat into your returns. For a long-term investment horizon like yours, mutual funds are a better option as they are liquid and professionally managed.

Other Investment Options to Consider
While mutual funds (equity and debt) will be the primary focus, consider a small percentage of your investment in other instruments:

Public Provident Fund (PPF)
The Public Provident Fund (PPF) offers tax-free returns and acts as a safe, long-term investment. Since it has a 15-year lock-in, it matches your investment horizon. You can invest up to Rs 1.5 lakh annually, which qualifies for tax deductions under Section 80C.

Gold ETFs
A small portion of your investment, say 5%, can be allocated to Gold ETFs (Exchange Traded Funds). Gold is a good hedge against inflation and market downturns. Unlike physical gold, Gold ETFs are more liquid and don't have storage issues.

National Pension System (NPS)
The National Pension System (NPS) is another long-term investment option. It’s especially useful for retirement planning, as it offers market-linked returns and tax benefits under Section 80C and 80CCD.

Monitoring and Reviewing Your Investments
Regular Reviews
Even with a 15-year horizon, it’s crucial to review your investments regularly. Markets and economic conditions change, and it’s essential to rebalance your portfolio periodically. This will ensure that your asset allocation stays aligned with your financial goals and risk tolerance.

Seek Professional Guidance
A Certified Financial Planner (CFP) can assist you in reviewing and adjusting your investment plan as needed. They will help ensure that your investments are tax-efficient and aligned with your evolving goals. Investing through a mutual fund distributor (MFD) who has a CFP credential offers added expertise, especially with active fund management.

Finally
Paras, starting your investment journey with Rs 1 lakh a month and a 15-year horizon is a fantastic decision. By diversifying your investments across equity and debt mutual funds, you can build a strong portfolio that balances risk and reward. Regular reviews and disciplined investing will keep you on track for a financially secure future.

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.