Arun is 27 years old. He started working about four years back.
His parents do well financially and are not dependent on him. Both are in government sector and have pensionable jobs.
He wants to contribute ₹5 lakh towards his sister’s wedding that is scheduled after six months. Additionally, he wants to set aside ₹5 lakh for own wedding that he expects to happen in the next 3-5 years. Any excess can go towards retirement.
Arun has bought life cover for ₹1 crore and a private health insurance plan of ₹10 lakh. His parents and sister are covered under separate plans.
His only savings are ₹8 lakh in EPF and ₹15 lakhs in bank fixed deposits. Of this, he has set aside ₹10 lakh towards emergency corpus. This can cover 12-15 months of his expenses.
Further, every month, ₹20,000 goes towards EPF. He can invest another ₹80,000 per month.
He knows he can invest aggressively given his age and income profile, but he is not clear about whether he will be comfortable with portfolio ups and downs.
Arun has got his insurance covered. He must, however, revisit the insurance portfolio once he gets married or assumes a financial liability such as loan. The emergency fund of ₹10 lakhs is robust too.
For his sister’s wedding, he can set aside ₹5 lakh from his fixed deposits. The wedding is too soon to take any investment risk.
For his wedding, he has just given a ballpark. Additionally, the timing is also not very certain. Assuming we have four years to save for his wedding, he will need to invest about ₹11,500 per month to accumulate his wedding fund. He can put this money in a bank recurring deposit or a debt mutual fund.
The rest of the amount (around ₹68,000) can go towards his long-term goals, including retirement. He is already contributing to EPF. Given his age, he must consider allocating money to growth assets such as equities.
At this life stage, it is important not to get bogged down with retirement planning calculations. Many life milestones are yet to come, and the best earning years are ahead of him. His time and energy are better spent on enhancing career and income prospects. From an investment perspective, he just needs to continue investing regularly.
He is new to risky investments and is unsure about his risk appetite. There are a few things that you can learn only through experience. Risk appetite is one such thing. While his age ensures this risk-taking ability is high,behavioural DNA defines his risk appetite otherwise. He wouldn’t know his true risk appetite unless he experiences market ups and downs first-hand.
There are two approaches he can take.
1. Not take any risk. Stick with EPF, PPF and bank fixed deposits. Given his age, such a conservative portfolio is not warranted. Moreover, he would never discover his risk appetite.
2. Take risk but reduce portfolio volatility. This is a better approach.
He can work with an asset allocation approach. From the incremental investments, he can route 50 per cent of the money towards equity and the remaining towards fixed income. He can start with a small allocation and inch up to 50-60 per cent in the equity investments.
After saving for his marriage expenses he can invest another ₹88,500 for long-term savings, out of which ₹20,000 already goes towards EPF. Assuming he wants to go with 50:50 allocation, ₹44,000 from his monthly savings can be in equity products.
For equity investments, he can
1. Start with a large-cap or a multi-cap fund. A simple large-cap index fund will do. Or
2. Pick a dynamic asset allocation fund or a balanced advantage fund. Or
3. Pick a single asset allocation fund that invests in domestic stocks, international stocks, and gold. Or
4. Pick a large-cap index fund, an international stock fund and a gold ETF/mutual funds. This replicates the third approach but is cumbersome to invest for a new investor.
The first approach is simple since picking up an index fund is an easy decision. For the second and third approach, he will have to pick up an actively managed fund and choosing one can be tricky. However, the second and third approaches are likely to be less volatile and easy to stick with. This is just the initial choice. As he gets more comfortable with equity investments, he can add different types of funds in the portfolio.
In the fixed income portfolio, he is already contributing to EPF. He can also invest in PPF. Beyond these two products, he can consider bank fixed deposits or a good credit quality and low duration debt mutual fund. For his income profile, debt MFs will be more tax efficient than bank FDs. However, debt funds carry higher risk than bank FDs.
The writer is a SEBI-registered investment advisor and founder of www.PersonalFinancePlan.in