Ask Morningstar: Start all financial planning with clarity on goals

Jan 19, 2023

I am 40 years old and I have 2 goals. 1) 7 years for my daughter education 2) 15 years for retirement. How should I create the portfolio?

Our advice is to always start early when planning for retirement as it helps to take advantage of compound earnings. You only have 15 years left to invest before retiring, so you need to act quickly.

Since I don’t know about the corpus that you require for each goal, I will share with you some pointers.  I suggest you take the help of a financial adviser as soon as possible.

Goal 1 – Daughter’s education

Seven years is not far away. With the rising costs of education, it is important to have a plan and execute it at the earliest so you can create a substantial corpus. The cost of education can vary for every child depending on the type of course the child is interested in taking. Hence, if you have an estimate of the corpus that you need for your daughter’s education, you can move backward to achieve it. Take into account inflation when calculating the cost of education.

Goal 2 – Retirement

Similarly, you have to estimate how much corpus you will require when you retire. The first step that you can do is list all your expected outflows such as household expenses, insurance premiums, healthcare, travel/leisure costs, etc. Also list the expected inflows after retirement such as pension, rental income, dividends, interest income etc. The difference between the expenses and inflows is the yield your portfolio should ideally provide to help you maintain your lifestyle.

There are also few factors you need to consider while calculating your retirement corpus. Given that you planned to retire at age 60, let us assume a life expectancy of 30 years post retirement. Therefore, whatever you accumulate must be sufficient for over three decades. This brings us to the of inflation, which eats into your purchasing power. Let’s say your monthly expenses today are Rs 1 lakh, and we assume an annual inflation rate of 6%. Rs 1 lakh will have the same purchasing power as Rs 1.79 lakh with an average annual inflation rate of 6% after 10 years.

How to start:

You need to articulate your goals and have targeted amounts. Take inflation into account.

When it comes to investing, at the outset, it is crucial to have reasonable return estimates for the underlying asset classes when investing towards a goal. This should be reasonable and in accordance with the allocation to the underlying asset classes in the portfolio.

Diversification also is important factor when building a portfolio. It protects the portfolio from any negative movements of a particular security or asset class. It is recommended to have a reasonable amount of diversification across asset classes, sectors, style, funds, and even fund houses.

An investor with a target horizon of at least 10 years and a higher risk appetite can go for an 80:20 allocation between equity and debt. The breakdown can be as follows:

  • 55% into large-cap stocks
  • 10% into mid-cap stocks
  • 5% into small-cap stocks
  • 10% into international stocks
  • 20% debt allocation could be invested in good credit quality funds from the categories such as Short Duration funds, Corporate Bond funds, Banking & PSU Debt and Medium to Long Term funds.

Review the portfolio periodically. While 15 years is a long period, you should check in on your investments at least once or twice a year to see how they're performing. As you get closer to your goals, you can start de-risking your portfolio by shifting from equities to debt.

For retirement planning, you can also consider including the New Pension Scheme.

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Articles authored by Nehal Meshram

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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