I want to start a SIP of Rs 20,000 per month for 10 years. Should I do it in 4 funds of Rs 5,000 each (1 Large Cap, 2 Multi Caps, 1 International). Or should I do it in 2 funds of Rs 10,000 each (2 Multi Caps)?
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. The 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.
Assuming an aggressive risk profile, and given the time horizon of 10 years, you can invest with a portfolio mix of about 80% into equities and 20% into fixed-income funds. The equity allocation can be split up as:
- 50%: large caps
- 10%: mid caps
- 4%: small caps
- 16%: international equities
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-term funds. As your goal approaches (2-3 years before the goal), shift allocation out of equity into fixed-income funds to lower the risk of drawdowns.
The resultant number of funds in the portfolio would be a function of the funds chosen to meet the suggested sub-asset allocation. Investing Rs 20,000 per month as per recommended asset allocation, you may be able to attain about Rs 37.8 lakhs at the end of 10 years. 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 look to increase the SIP annually in line with the rise in your income, and also invest any windfall gains that you receive as per the recommended allocation then.
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, or ELSS funds. These are diversified equity funds that have a lock-in period of 36 months.
Please do read How to prepare for what you can’t predict.
It is advisable to have an emergency corpus in place worth at least 6 months of expenses.
Consider term insurance and health insurance to safeguard against any untoward incident.
Please do read What is the weakest link in your finances?
You should evaluate your portfolio at periodic intervals with regard to your stated goals and make suitable adjustments.
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