The benefit of investing young

When you start investing at a young age, the amount of wealth that can be generated is immense.
By Mohasin Athanikar |  14-07-20 | 
 
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About the Author
Mohasin Athanikar is an Investment Analyst for Morningstar Investment Adviser India.

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.

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.

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ninan joseph
Jul 18 2020 06:03 PM
 This is one topic, which I do not understand at all. I am an investor since 2007 when Index was around 7000 (odd). If I had started investing regularly since 2007, after 13 years in March 2020, the market came back to the same level as in 2007. So can someone explain the rationale in this. On the contrary if I had invested in a recurring deposit at 9.25%, an amount of 52,000. I would have made 1 crore in just 10 years. This is the wonder of compounding not investing in stocks. I also invested every year in NPS. In 2020, the value has not fallen but has given be break even value of total investment. What they keep saying is not true. The basic idea is to sell the stocks when it has achieved your objective and not to just keep investing. This is the core. Dont be greedy. Once you get a predetermined return, start selling so your average cost falls and then leave it. O
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