Q. I am 20 years old, pursuing my undergraduate degree. I have Rs 1.7 lakh in mutual funds, Rs 1,000 and Rs 500 monthly SIPs in large & mid cap and flexi cap funds, respectively, and Rs 2,000 in stocks. What more can I do to build around Rs 10 crore in the next 40 years while taking inflation into consideration. Please guide me.
Response: It’s good to see that you understand the significance of retirement planning at such a young age. Focus from this early age should allow you to comfortably reach your post-retirement goals with disciplined investing.
I am assuming that Rs 10 crore is the present value of your target retirement corpus. At an annual inflation rate of 5%, the target size for your retirement corpus after 40 years would be about Rs 70.5 crore. I am also assuming your existing mutual fund investments of Rs 1.7 lakh to be in equity mutual funds. These investments should grow to about Rs 1.58 crore in 40 years if I assume an annualized return of 12%.
Now coming to your fresh investments for the retirement corpus, I will suggest you to continue with your existing SIPs till you have an income source of your own. Once you have a sustainable flow of income, which I am assuming to be 3 years from now, you can increase your SIPs to Rs 30,000 per month. Spread your SIPs across between equities, fixed income and gold in the ratio of 80:15:5. Ensure to increase or step up your monthly SIPs by at least 10% each year, depending on your annual growth in income and investible surpluses. Assuming an annualized return of 12% and an annual step-up rate of 10%, you will have a retirement corpus of about Rs 72 crore by the time you complete 60 years of age.
For your equity portfolio, you can spread your investments equally across flexicap funds, large cap funds and multi-asset funds. You can consider the direct plans of Parag Parikh Flexi Cap Fund and/or HDFC Flexi Cap Fund for the flexicap category; ICICI Prudential Bluechip Fund and/or HDFC Top 100 Fund for the large cap category; and Nippon Multi Asset Fund and/or ICICI Prudential Multi Asset Fund for the multi-asset category. You can also redistribute your existing mutual fund investments and stocks, except the high conviction ones, among the above-mentioned funds in the same ratio.
Your fixed income portfolio can be parked in high yield bank FDs offered by small finance banks and a few private sector banks. You can consider banks like Unity Bank, Suryoday Bank, Utkarsh Bank, Ujjivan Bank, Jana Bank, RBL Bank, Bandhan Bank and DCB Bank, which are offering FD yields of 8% and above. Once you have a taxable income, invest up to Rs 1.5 lakh in PPF each financial year to save income tax under Section 80C and earn tax-free interest income. For your exposure to gold, you can invest in Sovereign Gold Bonds through the secondary market at monthly intervals.
Also ensure to purchase health insurance cover of at least Rs 1 crore, if not covered under any family floater plan, with a base health cover of Rs 5 lakh and super top-up cover of Rs 95 lakh. Once you have dependents, purchase term insurance plan(s) equaling 25 times of the annual expenses of your dependent(s). You can visit Policybazaar.com to compare the term and health insurance cover(s) offered by various insurance companies.
An edited version of this article is published in The Economic Times on August 26, 2024.