I am currently 23 and I am looking at investing in mutual funds. I can afford to invest about Rs 50,000 to Rs 75,000 per month. I would like to know how to build my portfolio around this.
For portfolio construction, an asset allocation-based approach (mix of equity and debt) should be followed as it is one of the key determinants of the portfolio’s performance. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity which have the potential to deliver relatively higher returns compared to fixed-income over the long term.
The asset allocation
Assuming an aggressive risk profile, no current liabilities and a long-term horizon, you can invest with a portfolio mix of about 90% into equities and 10% into fixed income funds.
The equity allocation can be split into large caps (45%), mid caps (17%), small caps (8%) and international equities (20%).
The international equity allocation offers diversification across geographies with exposure to different growth drivers, and a hedge against currency risk.
For investment in fixed income, you can consider accrual fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds and Medium-to-Long Term funds. Take a look at some of our fund analyst reports.
As your goal approaches (3-4 years before your goal), shift allocation out of equity into fixed-income funds to lower the risk of drawdowns.
The tax factor
For availing tax deductions under the old tax regime, you may look to invest some portion of the investible corpus into equity linked savings schemes (ELSS), which are tax-saving funds (lock-in of 3 years). Debt instruments are also available for tax saving, such as Public Provident Fund (PPF) and National Savings Certificate (NSC).
You can also consider the National Pension Scheme (NPS) for investing towards your retirement goal, which offers an additional deduction of Rs 50,000 under Section 80CCD (1B) over the above the Rs 1.5 lakh deduction under Section 80C.
The wealth corpus
Investing Rs 75,000 per month as per recommended asset allocation, you may be able to attain about Rs 27 crore at retirement (at age of 60 years).
Increasing the SIP amount by 5% p.a. would help you to reach about Rs 47 crore.
The corpus amount has been computed assuming equity market returns of 10% per annum and fixed income returns of 6% per annum. To attain a higher corpus, you can invest any windfall gains that you receive, in line with the recommended allocation at that point in time.
The loose ends
Also look at a health insurance plan, term insurance if you plan to start a family or have dependents, and an emergency fund. Do read Why you need an Emergency Fund.
You should evaluate your portfolio at periodic intervals with regards to your stated goals, and make suitable adjustments accordingly, if needed.
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