I am 32 years old and I have been investing through systematic investment plans in Franklin's Bluechip and Prima funds for a year now. After revisiting my financial goals, I have come up with the followings plan and target mutual funds:
2) For my retirement I would need around 60 lakh, other than my provident fund amount where my total (my contribution + employer's contribution) contribution is Rs 5,500 per month. For this I have planned to invest Rs 3,000 per month in Templeton India Pension Plan and Rs 2,000 per month in HDFC Long Term Advantage Fund. The choice of the funds for this purpose is also influenced by tax saving. I would like to invest for 11 years and leave the amount invested (without further contribution) for next 12 years when I reach 55.
3) I want to accumulate a wealth of around Rs 50 lakh over the next 11 years. For this purpose I have planned to invest Rs 2,000 per month each
in Franklin India Prima, Magnum Contra, Reliance Vision and Reliance Growth Fund.
I have the following questions:
1) Are the goals realistic with the contribution amount and period?
2) Is the choice of the funds correct for each category? My risk appetite is moderate but do not want to take big risk with my kid's education and retirement amount.
First, we would like to congratulate you on your approach to financial planning. Very few people think the way you are thinking with regard to investing. You have a target in mind and you are working towards achieving it. We will look at your portfolios and see whether you can achieve the target, based on your implicit returns in the three portfolios. While we do not have the ability to gaze into the future and tell you that your financial goals will come true, we can surely help in telling you whether you are thinking correctly.
You have a mix of two good balanced funds and one large-cap diversified equity fund. If you want this portfolio to become Rs 18 lakh in 11 years, you are expecting a return of about 13.4 per cent every year. The two balanced funds invest up to 70 per cent in equity and the remaining in debt. Assuming a risk premium of 30 per cent on the risk-free rate of 6 per cent (the money you will earn in a fixed deposit in a nationalised bank), the debt component of your balanced funds will earn about 7.8 per cent. We can assume that the risk premium on equity could be 100 per cent, which will mean that your equity component will earn 12 per cent. The returns at these rates work out to 11.16 per cent, which is slightly more than a 2 per cent shortfall.
For your retirement portfolio, your implicit annualised returns work out to 12.7 per cent in two funds, both of which are good. Here you have Templeton India Pension Fund which invests around 60 per cent in debt and HDFC Long Term Advantage which is an equity fund. At 7.8 per cent returns for the debt component and 12 per cent for the equity component, the returns work out to 10.49 per cent, which is again a shortfall of over 2 per cent.
Your wealth portfolio has four good diversified equity funds. In order to achieve your Rs 50 lakh milestone, you will need to earn an annualised return of 23.6 per cent from this portfolio. That is twice the return that you could expect from equity funds. While your other two portfolios can still achieve their targets, your expectations from this portfolio are aggressive.
The Right Approach
Even though our estimates of returns are ballpark, we believe that it is better to be conservative rather than aggressive in our expectations. We think you are over-estimating the returns that you will earn from your mutual fund investments. Mind you, we could be wrong. In the past, good funds have generated sustained returns of the kind you expect. But if we are wrong, we'll be wrong by being pessimistic, which is better than being wrong by being over-optimistic.
But the fact that you are thinking in this direction gives us the confidence that you will manage to achieve your targets. We feel that since your horizon is over 10 years, you will be better off investing a higher chunk in equity funds. The fact that you have such a clear plan also means that you will be monitoring your investments regularly enough. If you pick a fund that maintains a Value Research Five-Star or a Four-Star status in its category, then you will be doing fine as far as the quality of funds is concerned.