NEW DELHI: Creating a retirement corpus of Rs 5 crore for a middle-class salaried person seems to be an arduous goal to achieve, but if one invests systematically, the path to reach the target becomes smoother and easier.
Personal finance experts say the earlier one starts investing, the better placed one is to achieve one’s financial goal. They say investment discipline is as important as how much one earns to create a big corpus for retirement. According to them, the financial goal of Rs 5 crore can be achieved by investing in long-term mutual funds, index funds and diversified portfolios.
If one starts investing at the age of 25, one will have 35 years of time to reach the target. Assuming rate of interest is 12% per annum, one can reach the target of Rs 5 crore by investing just Rs 7,698 a month. Similarly, if one starts investing at the age of 30, then one will have 30 years to create a corpus till reaching the retirement age of 60.
At 12% rate return, one will have to invest Rs 14,164 per month to achieve that goal. If the tenure goes down to 25 years, the investment amount goes up to about Rs 26,349 per month. There could be several factors for delayed retirement planning such as spending more on luxuries and giving priorities to immediate goals. But delay in retirement planning could add up to one’s burden, as more delay one does the more aggressively one will have to invest later in life.
Investment strategy
Many personal finance experts advise step-up investment strategies. Step-up strategy refers to increasing the SIP amount allocation by a certain percentage every year as income grows.
Pankaj Mathpal, MD & CEO at Optima Money Managers, says it will be appropriate to invest in equity mutual funds through SIP route initially and in the last 5 years the investor can switch to hybrid or debt funds systematically.
"Assuming that the investment horizon is 30 to 35 years and the investment grows at a CAGR of 12% in the first 25 years and 10% in the last 5 years on investment to accumulate Rs 5 crore in 30 years, the investor can start with Rs 7,000 per month in the first year and increase the SIP (systematic investment plan) amount by 10% year after year. Suggested allocation is 40% large cap, 30% mid-cap and 30% small-cap," he says.
Ravi Singh, vice-president and head of research at Share India, suggests investing in two to three balanced funds (aggressive hybrid) or multi-cap funds will be a good option. The advantage of a balanced fund is that it will be automatically rebalanced without the intervention of the investor.
Balanced funds typically ensure a 70:30 equity and fixed income allocation. Multi-cap fund will be a little more volatile than a balanced fund but it can give more return, says Singh.
Another way of building a portfolio is to have two multi-cap funds -- one mid-cap and one small-cap. This composition of funds is slightly more aggressive but gives good returns on rising markets over a longer period. In case one starts investing late, one can build a corpus of Rs 5 crore by making a monthly investment of Rs 26,000 for 15 years for a realised return of 25% per annum, Singh adds.
Diversification is the key for any portfolio and one can look at diversifying across equities and debt investments.
According to Saurav Ghosh, co-founder of Jiraaf, "For investment goal of Rs 5 crore, portfolio would be 70% allocated to equities (45% to domestic, 15% to international equities) and 30% to debt (20% to products for capital preservation like fixed deposits, AAA-rated papers and 10% to high yield fixed income products)."
Balwant Jain, Mumbai-based independent tax and investment expert, is of the view that for making a long-term corpus, say with 30-35 years horizon, one should have investment mix of 40% in index funds representing Nifty 50 and Sensex and dividing the rest between mid-cap and small-cap by half.
That will give them at least 12% return on average. Historically, index funds have provided 15-16% returns, but since the interest rates have come down the returns expected is nearly 12% on average. He also suggests that one should review mutual funds’ performance periodically and non-performing funds should be shut.
But once they are close to their goal and around the age of 60, they should move their funds to safer investment instruments such as senior citizen investment schemes where the rate of returns are over 7%, says Jain. One such scheme is Pradhan Mantri Vaya Vandana Yojana.
The scheme provides an assured pension of 7.40% per year, payable monthly. This assured rate of pension is payable for the full policy term of 10 years from the date when the policy is purchased.
