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The Long Run

My goals are to accumulate Rs 15 lakh for my daughter's education in 15 years' time, about Rs 10 lakh for her marriage after 20 years and Rs 50 lakh for my retirement after 30 years. I seek your opinion to lay down a plan for this-Sachin

I am a 30-year married man with a year-old daughter and have been investing in mutual funds for over a year now through the SIP route. My current investments of Rs 1 lakh is spread over nine funds. I have gone through your magazine and formulated strategy for my future investments. For this purpose, I would like to lay down my plan and seek your opinion on that. My financial goals are to provide an estimated Rs 15 lakh for my daughter's education about 15 years from now, perhaps about Rs 10 lakh for her marriage after twenty years and Rs 50 lakh for my retirement after 30 years.

For these, I plan to invest Rs 1,00,000 in the first year and increase the investment amount by 20 per cent each year. I plan to invest for 10 months in a year leaving a couple of months to save for any tax planning investment liabilities that I have. My choice of funds is dictated by your Value Research ratings and my own prior investments which on hindsight I realise to be good enough. My planned investments are in the table.

This makes it around 83:17 equity:debt ratio. I plan to invest further Rs 20,000 in PPF solely as a long term debt and not for any tax benefit so as to make my target equity:debt ratio as 70:30. This also keeps an almost equal exposure to large-caps and mid-caps (42:40) since I can take some amount of risk by investing in mid-caps. Am I on track? Would my investments yield returns as I expect assuming I am able to increase my investments by 20 per cent every year?

Sachin's Portfolio
Fund  % Allocation
Fidelity Equity 10
Franklin India Prima 10
HDFC Capital Builder 10
HDFC LT Advantage Fund 20
Kotak Mid-Cap 10
Pru ICICI Dynamic 10
Reliance Equity Opportunities 10
Sundaram Select Midcap 10
Tata Pure Equity 10
Total  100

If you really do manage to stick to your goal of starting with an annual investment of Rs 1 lakh and increase this by 20 per cent every year, you probably don't even need to invest in a mutual fund to achieve your targets. In fact even your savings bank account will earn much more than what you are aiming for. Even if you want to achieve all your targets at the end of 15 years, it's possible through your savings bank account. Of course, the fly in the ointment, as it is in all such calculations, is inflation. With a 6 per cent inflation, what looks like 15 lakh today will be close to Rs 36 lakh in 15 years. And by the time you retire, whatever can be bought with Rs 50 lakh today will need Rs 2.8 crore. By the way, in recent years the cost of professional education has risen at around 10 per cent per annum. If one factors in a 6 per cent inflation rate into your targets, you'll need Rs 36 lakh in 15 years, another Rs 32 lakh in 20 years, and Rs 2.87 crore in 30 years.

However, increasing your savings by 20 per cent a year for 30 years will be a tough act. If you make the calculation, you'll discover that this leads to a situation where you would actually have invested Rs 11 crore over 30 years. It's that old magic of compounding at work here, though not in a way that you'd like.

Let's get a little realistic and restate your problem. Let's assume that over the long term, you'll get about 15 per cent returns from the market. Let's figure out that if these were the returns, then how much would your savings have to increase in order for you to reach the inflation-enhanced targets. It turns out that and increase of just 5 to 6 per cent every year in the amount you invest should be enough. Practically speaking, you should try and better than that in the early years to let the magic of compounding do some extra work, but this is a reasonable goal.

Now, let's get back to your existing portfolio. As per the Value Research Portfolio Manager, 94.99 per cent of your assets is invested in equities, 0.88 in debt and the rest is cash. Mid- and small-cap stocks constitute 61 per cent of your investments, while nearly 37 per cent is invested in large-cap stocks. Overall, your portfolio looks in shape given your long-term investment horizon. The presence of new funds, which you've said were bought under pressure from your distributor, is not a good sign. Remember, it's your money. If your fund flops, it will hurt you and not your distributor. Therefore, it's you who should and must decide about your investments.

Your planned portfolio looks much better. All the constituents have good performance track record. However, we suggest you lay greater stress on funds like HDFC Equity and Reliance Vision, as they have the flexibility to move between large- and mid-cap stocks depending on the time.

We believe you are on track. If you continue to invest as methodically as you are doing now, you can achieve much better results than what you are aiming for at present. Our final suggestion to you will be maintaining three separate portfolios for your goals: for daughter's education, her marriage and your retirement. This is because you will need the money at different points of time, and probably have different risk-reward requirements for each goal. For instance, the investment for your daughter's education is long-term now but you can't afford to take huge risk once the goal nears. Therefore, allocate you proposed annual investment proportionately to the three portfolios. You can start with all-equity portfolios. But as you approach your goals, shift the money to debt funds.