Q. I am 29 and earn a monthly salary of Rs 75,000. I don’t have any investments right now. I aspire to retire within 20 years. What should be my investment strategy if I want to retire with a corpus of Rs 6 crore?
Response: As you have not shared the figures for your current living expenses, I am assuming it to be 50% of your current salary. If I further assume an inflation rate of 6%, your life expectancy of 80 years, annualised return of 12% and 8% during the pre-retirement period and post-retirement stages, you would need a corpus of about Rs 3.14 crore at the time of your retirement. To create this corpus, you would require a monthly investment of Rs 31,000 in equity funds. However, achieving your target corpus of Rs 6 crore within 20 years would require a much higher contribution — a monthly investment of about Rs 60,000 in equity funds.
As a solution, I would suggest you to keep aside about 50% of your current monthly salary for your monthly contribution towards post-retirement investment corpus and then, increase this contribution by at least 10% every year.
Coming to the asset allocation part for your post-retirement portfolio, maintain an equity-debt asset mix of 8:2 for your monthly contributions towards your post-retirement portfolio. As asset classes rarely move in the same direction and/or momentum, portfolio diversification through a mix of asset classes would help reduce the risk to your portfolio.
Start with monthly SIPs of Rs 28,000 in equity funds and invest Rs 7,000 per month in debt funds and other fixed income instruments. Assuming an annualised return of 12% with a 10% annual increase in the SIP contribution, your equity corpus should grow to about Rs 5.56 crore in 20 years. Similarly, an annualised return of 7% from fixed income instruments with an annual increase of 10% in monthly contribution should grow your fixed income corpus to about Rs 84 lakh in 20 years.
Split your equity SIP contributions equally between large cap funds, flexi cap funds and multi-asset funds. You can consider the direct plans of Parag Parikh Flexi Cap Fund and Quant Flexi Fund for the flexicap category; ICICI Prudential Bluechip Fund and HDFC Top 100 Fund for the large cap category; and Quant Multi Asset Fund or ICICI Prudential Multi Asset Fund for the multi-asset category.
Coming to your fixed income portfolio, you can invest a part of it (up to Rs 1.5 lakh allowed in each financial year) in PPF. While the investment amount would qualify for tax deduction under Section 80C, the returns generated are tax free. Moreover, the sovereign guarantee provided to PPF makes it one of the safest instruments in terms of capital protection and income certainty.
Invest the rest of your fixed income contributions in the direct plans of long duration debt funds like SBI Long Duration Fund and HDFC Long Duration Fund. As long duration debt funds have the longest maturity profiles among all debt fund categories, these funds would generate higher returns than other debt funds as and when market interest starts to fall. As the reverse would be true during a rising interest regime, steadily shift your existing investments in long duration debt funds and fresh debt fund contributions to ultra-short-duration debt funds as and when the signs of interest rate regime reaching its bottom becomes clear. Prefer funds having highest exposure to government bonds, PSU bonds and AAA-rated corporate bonds while selecting your ultra-short duration debt funds.
Apart from your retirement corpus, you should also maintain an emergency fund to cover your unavoidable expenses for at least 6 months. This should help avoid disruptions to your retirement corpus for tackling financial emergencies. You can park this fund in the fixed deposits of scheduled banks offering FD yields of 8% and above, like Suryoday Bank, Unity Bank, Utkarsh Bank, Fincare Bank and Equitas Bank.
Also purchase term insurance cover equalling 20 times of your family’s annual expenses to ensure the financial security of your dependents in your absence. You can visit Policybazaar.com to compare and choose term insurance cover(s) from any of the following private sector life insurance players — HDFC Life, ICICI Prudential, Max Life, PNB Metlife, Bajaj Allianz Life and Tata AIA.
Also ensure to buy a health insurance cover of at least Rs 1 crore, with a base health cover of Rs 5 lakh and super top-up cover of Rs 95 lakh. You can visit Policybazaar.com to compare and choose health insurance cover(s) from Niva Bupa or Aditya Birla health insurance companies. These private sector health insurance companies offer bigger covers at very low premiums.
An edited version of this article was published in The Economics Times Wealth on April 15, 2024.