The Morningstar Investment Management team provides some guidelines before answering each query.
- For portfolio construction, an asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and return. A suitable asset allocation is typically based on investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.
- Given the current market scenario post the IL&FS fiasco, when referring to debt funds, it is advisable to invest in Banking and PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.
- We recommend that you consult a financial adviser to help fine tune your portfolio and advise you on relevant fund investments.
I'm a central government employee. My take-home salary is Rs 36,000/month. My risk profile is moderately high. How much must I invest over this time period to build a good corpus over 20 years? I recently began investing in equity mutual funds via SIPs of Rs 1,000 each in ABSL Frontline (large cap), Mirae Asset Emerging Blue Chip (large and mid cap), and HDFC (small cap).
- Pukhraj
Considering your horizon of 20 years and moderately-high risk profile, you can have an allocation of 70% to equity and 30% to fixed income. As your goal approaches (last 3 years), the allocation should shift around 10% each year out of equity into fixed income.
To attain your goal, you can look to allocate about 55% to large caps, 10% to mid caps and 5% to small caps, as far as equity goes. The remaining 30% allocation can be across accrual fixed income fund categories (Banking and PSU, Short Term Income, Corporate Bond) that maintain a high credit quality portfolio.
Investing Rs 3,000 per month as per asset allocation suggested above, you would reach a corpus of about Rs 22 lakhs at the end of 20 years. If you increase your SIP amount by 10% annually, you would reach about Rs 47 lakhs. The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.
I am 44 years old. I need to build a corpus of Rs 2.5 crore in the next 10 years. Please advise.
- Jimmy
Considering your horizon of 10 years and assuming a moderately-high risk profile, you may have an allocation of 70% to equity and 30% to fixed income. As your goal approaches (last 2 years), the allocation should shift around 10% each year out of equity into fixed income.
To attain your goal, of the equity exposure, you can look to allocate about 55% to large caps and 10% to mid caps and 5% to small caps. The remaining 30% allocation can be across accrual fixed income fund categories (Banking and PSU, Short Term Income, Corporate Bond) that maintain a high credit quality portfolio.
Investing Rs 1,25,000 per month as per asset allocation indicated above, you would be able to reach your goal at the end of 10 years. You can reach the same goal by investing Rs 85,000 per month and increasing your SIP amount by 10% annually. The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.
What kind of instruments or mutual funds must I invest in if I have a 3-month perspective?
- Hitendra
You can invest in funds across overnight, liquid, ultra short term, low duration and money market categories. It is advisable to invest in liquid funds as they invest in high credit quality instruments and involve lower mark-to-market risk. Also, they have no exit load and any redemptions are credited to your account in T+1 business days.
You may obtain a higher yield if you invest in ultra short term, low duration and money market categories, as they involve relatively higher credit risk and duration risk; however they may be subject to exit load periods of three or more months.
Also, one should evaluate the expense ratio of the underlying fund before investing, as lower expense ratio funds result in higher returns assuming other fund attributes are equal.
I'm 45-years old, working in the IT industry. I've a 12-year old son in school. My wife is a freelance teacher but doesn't have a regular income. I' d like to build a corpus for my son's education of Rs 1 crore (5 years) and a retirement corpus of Rs 2-3 crores (10 years). I can invest Rs 2 lakhs/month and I can take moderate risk
- Harish
Considering your goal horizon and risk profile, you may have an allocation of 65% to equity and 35% to fixed income. As your goal approaches (last 2 years), the allocation should shift around 10% each year out of equity into fixed income. To attain your goal, for equity investments, you can look to allocate about 50% to large caps and 15% to mid caps. The remaining 35% allocation can be across accrual fixed income fund categories (Banking and PSU, Short Term Income, Corporate Bond), funds maintaining a high credit quality portfolio.
Investing Rs 2,00,000 per month as per asset allocation indicated above, you may reach your goals comfortably (education goal of Rs 1 crore and retirement corpus of around Rs 2.4 crore) at the end of 10 years. Additionally, if you increase your SIP amount by 10% annually, you may reach a retirement corpus of about Rs 4.3 crore at the end of 10 years. The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.
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