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Mailbag: 22 years old & ready to invest for 25 years!!

A young reader (Dhruv) in his early 20s asked us a question. He has 25K to spare every month. He wants to know his options if he wants to invest this money (every month) for next 25 years. As we mentioned earlier also in our previous post, we are delighted to see that people ready to commit to long term wealth building for decades and not years. 🙂
So in this post, as we promised, we will try to address our young reader’s query.
 
 
But remember, there is no perfect way. People might take different roads to the same goal. So, go ahead and do let us know of your views in comments section.
Theoretically, putting aside 25K every month for next 25 years in a simple PPF account itself would create a corpus of 2.6+ Crore. And that is without even taking any risks. These are sure-shot returns. Unless the govt. and everything else comes crashing down.
But since you are young, it makes sense to take some risks. And with time horizon which you have, many (if not all) risks of so-called risky assets can be evened out.
We don’t know much about you, your family or your financial background. We only know two things. You are ready to invest 25K every month. You are ready to do this for next 25 years. Due to lack of important information, it is fundamentally not possible (and unethical) to suggest anything concrete here. Therefore, we will make certain assumptions and then give our thoughts.
Assumptions
  1. You are ready to invest 25K every month NOW.
  2. You don’t have any liabilities NOW.
  3. Your income (salary, etc) will increase every year for next 25 years.
  4. Your liabilities will increase in future (not uniformly though). i.e., you would need to fund your higher education, marriage, honeymoon, parent’s health, property purchases, etc.
  5. Hence we assume that though your income would increase, you will not be able to increase your contribution to investments. Your investment contribution would remain fixed at 25K per month.
  6. You and your family are adequately insured.
  7. You and your family have adequate health insurance.
  8. Though glamorous, we have chosen not to include individual stocks as an asset class for your wealth creation plan. It requires effort and passion. Since we don’t know much about you, it is best to avoid it. 🙂
 
What We Suggest
  1. Before even thinking of investing, keep aside 6 month’s expenses worth of money in some liquid asset classes. You can keep it in a savings account or an online fixed deposit. These days it’s easy to make (and break) online fixed deposits when required. So this should take care of your Emergency Fund.
  2. From the 25K, you should put in 10K (8.33K to be exact as there is a limit of 1 Lac on investing in PPF each year)* every month in a PPF account. This would turn into around 85 Lacs in 25 years. Now this is separate from your and your employer’s PF contribution. Remember, you cannot touch this money before 15 years (though you can withdraw some after 6 years, let’s not get into those details).
  3. For the remaining 15K, chose 4-5 good mutual funds. As one reader suggested in the previous post, it is better to stick with index funds when considering such long term horizons. That way, dependencies on fund managers and his team are reduced to almost nil.  So you can go ahead with 3 index funds (4k, 3K, 3K = 10K). But it is also advisable to pick two well established actively managed funds (2.5K each). These funds should have been in existence for more than 10 years and should have proven the mettle in multiple market cycles. For names of such funds, check out our last post and its comment section. This 15K every month for next 25 years would create a corpus of around 2.2 Crore.
Problems which you might face in future
Now suppose that you want to buy a property after say 5 years. You would definitely be tempted to take money from this corpus which you would have created in last 5 years. Now though this approach looks sane and full of common sense, the problem would be that this would break the COMPOUNDING. Once compounding breaks and you continue to invest for next 20 years (after 5 years from now), your PPF contribution would have become 52 Lacs & MF would have become 1.2 Crore (Down from 2.2 Crore in previous case). So, you should plan your big expenses in such a manner that you long term compounding is not interrupted.
 
So how can one do this? Though it may not seem like a good idea at first, what you can do is to reduce this 25K contribution in PPFs & MFs to around 15-20K. Park the remaining money every month in some recurring deposits or income funds. This way, you would have started preparing yourself for future expenses and would not be required to interrupt compounding of your investments.


Hope that helps. Others are welcome to pour in their thoughts.

* – Thanks our reader Hemant Bhatia for bringing this to our notice.

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Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

15 comments

  1. Simply envy this guy, If got this advise in my early 20's I would have been reasonably rich by now (I too got decades of investing life ahead 🙂 ). SI's final recommendation is perfect since the recurring deposit will safeguard his core investments. Once he earn enough knowledge about the markets and can afford to loose some money he may start invest directly in stocks for better returns.

  2. SI, I have what is probably a very basic question which I am afraid to ask because it might expose my ignorance. I too want to invest 10-15k of my money every month in mutual funds – I have even identified the funds I wish to invest in – HDFC TOP 200 and and a couple of other funds rated 5 stars by morning star….but my question is how ? I have a trading account in Kotak Securities …can I buy some units of these funds per month using my trading a/c just like one buys shares ? The customer care at Kotak just confused me further….I couldn't make the head or tails of what they were trying to say despite repeated attempts….but I did learn that my KYC is enabled and mutual fund option in in trading a/c is enabled…..but they initially said I can buy funds like HDFC, then said I cant…leaving me completely confused…..

    I hope you can help 🙂

    Also, since I am a big novice when it comes to mutual funds…can you point out a specific top 1 or top 2 index fund which I can invest in ? And is the mechanism for investing in index funds same as in mutual funds….

    Jeez….I have been asking you so many questions since I discovered your blog 1 week back…you must be like “Oh God, its that guy again !! ” 🙂

  3. I wish someone was there to advise me like this when i started working in 1997. I wasted a full 8 years before getting into equities/mutual funds and taking savings seriously. That way i missed the real beginnings of the market boom. Nevertheless, better late than never. The last 8 years have been a great journey investing.

  4. I am 25 years, working for the last 3 years. My investments include only EPF, NPS & PPF for the last 3 years (for tax planning only & hence the total comes to 1 lac yearly & this would be continued.) I have saved 5 lacs over these 3 years. This i plan to invest in direct securities. I save 25-30k monthly which i plan to invest in Mutual Funds. Which would you recommend for a person who is already investing in direct equity?
    P.S. I have a investment horizon of 25years+ & all the assumptions except 8 is true for me

  5. Investing all your savings (5 lac) in direct equities is not advisable. That is not to question your stock picking ability or anything. It is just to suggest that while we are young, we should focus more on 'not being wrong' rather than 'looking for multibaggers'. And easiest way of not being wrong in markets is to stick with MFs. You can start with what you yourself suggested, i.e. the MF route (via SIP).
    For 25 years, you can go ahead with 3 index funds to build a core portfolio. You can then chose some of the good funds like HDFC Top 200, IDFC Premier, etc to make additional SIPs. But you would have to regularly monitor you investments in actively managed funds like these.

    As far as your 5 lac is concerned, you can make regular staggered purchases of shares in businesses you understand. Or you can also look at other assets like real estate. You can consider making a down payment with this lump sum amount and then start with direct equity investing.
    PS – These are our views. You can definitely make your own choices with your 5 lacs 🙂

  6. I have been trading virtually for the last 2 years & I think I am ready to take the plunge. Consider the 5 lacs as capital for share investing business. All gains will be reinvested & losses will not up adjusted by bring in new capital. i.e. capital will be fixed at 5 lacs.

  7. Let me rephrase the questions.
    say I have invested 5 lacs in 10-12 stocks & m comfortable with the risk & can keep a track on thses shares.
    In such a case where should the 25000k surplus monthly generated be invested.
    Assume no other investment

  8. Thanks for your detailed reply Mr. Stable Investor,

    I don't want to repeat the same mistakes my father's generation made when it comes to wealth creation and would therefore like to start as early, and stay in the game for as long as possible.

    Now coming to your post, all your assumptions are spot-on 🙂 except for the fact that I haven't yet secured a term insurance (in the works, will be done in a month or so). Also, with regards to future expenses I would like to provision for (In decreasing order of priority) – Property, Higher Education & Marriage. Also, I am already saving 3k per month as EPF and 3.5k per month in my superannuation fund.

    With these caveats in place how should I allocate my 25k?

    – First, I'll set up a PPF account for 5k per month (Rest 40k in NSC)

    – Second, a RD with my bank for 5k per month for future investments in realty etc.

    – Third, 10k SIP in an index fund + 5k SIP in a mid-cap/growth fund (is the growth fund advisable? or should I invest in a dividend fund instead?)

    Queries –

    In case I proceed with the above given structure, what can I do to boost my portfolio's CAGR? I love the idea of steady accumulation of high-yield dividend stocks. Is there a way to accumulate enough in order to sustain my cost of living 30 years hence simply from the dividend payout? Or should I be looking to invest in potentially high growth stocks and rise with the boom in the indian economy? For example, sectors like steel, infra, power, cement etc. are bound to do exceedingly well over a 30 yr horizon considering the amount of infra that needs to be built in this country. Should I consider owning such companies?

    Finally, what is your take on other asset classes like realty and gold? What part do they play in a long-term investor's portfolio.

    Many thanks,
    Dhruv

  9. Ok. Seems you have done your homework. It is good that you realized early on that its best to try something first and then take a plunge. Wishing you great investing ahead. 🙂

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