Please avoid posting questions related to individual stocks. We will not answer them.
- You are ready to invest 25K every month NOW.
- You don’t have any liabilities NOW.
- Your income (salary, etc) will increase every year for next 25 years.
- 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.
- 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.
- You and your family are adequately insured.
- You and your family have adequate health insurance.
- 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. 🙂
- 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.
- 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).
- 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.
Hope that helps. Others are welcome to pour in their thoughts.
* – Thanks our reader Hemant Bhatia for bringing this to our notice.
|How to divide 10K among 3 different Mutual Fund Schemes|
If you belong to the same generation as me (born in mid-late 80s), then chances are that you would have heard about NSCs, but would not have invested in them. But if you are of a generation prior to me, then chances are high that some of your money might be invested in this instrument.
|National Savings Certificate|
But there is another problem with NSCs. These instruments have a lock-in of 5 years and 10 years. Now this is an extremely long period for our impatient generation. But there is a way in which this lock-in can be managed in a way that an investor receives some money at the end of every year. The approach which I’ll discuss increases the liquidity of NSCs, with a little help from Fixed Deposits. This approach reduces the return a little. But that is a price we need to pay for increased liquidity. 🙂
|NSC Ladder : Click to enlarge|
This is what exactly happens –
- 1st Tranche: Invested Rs 20,000 in FD for One Year – Received Rs 21,600 at end of Year 1 – This sum is invested in NSC for 5 Years – Received Rs 32,750 at end of Year 6.
- 2nd Tranche: Invested Rs 20,000 in FD for Two Years – Received Rs 23,545 at end of Year 2 – This sum is invested in NSC for 5 Years – Received Rs 35,699 at end of Year 7.
- 3rd Tranche: Invested Rs 20,000 in FD for Three Years – Received Rs 25,901 at end of Year 3 – This sum is invested in NSC for 5 Years – Received Rs 39,271 at end of Year 8.
- 4th Tranche: Invested Rs 20,000 in FD for Four Years – Received Rs 28,232 at end of Year 4 – This sum is invested in NSC for 5 Years – Received Rs 42,805 at end of Year 9.
- 5th Tranche: Invested Rs 20,000 in FD for Five Years – Received Rs 30,073 at end of Year 5 – This sum is invested in NSC for 5 Years – Received Rs 45,597 at end of Year 10.
Pay Yourself First. This has often been referred to as the Golden Rule of Personal Finance. So what exactly does it mean and how can you do it?
|Save & Invest before Spending|
- In case you are planning to save for your retirement, ask your employer to automate your PPF, EPF, VPF deductions. In this way, you would have saved for your retirement, before even getting any money in your wallet!! 🙂
- If you are interested in stock markets, you should make regular monthly investments (SIP) in good mutual fund schemes. This can be automated via an ECS mandate to your bank.
|You Action Plan to pay yourself first.|
|Always calculate the real growth rate of your investments|
What is CAGR
Investopedia defines CAGR as –
“CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.”
Formula for calculating CAGR
A simple formula for calculating CAGR is,
A simple tool to help you calculate CAGR
We have created a simple CAGR Calculator, which you can use to calculate real returns for your investments. To download this calculator, click on this link. You will be taken to a Google Spreadsheet. Go to the File Menu, and click Download. Once the spreadsheet is downloaded, you can fill up the required numbers and the CAGR or Final Amount or Years will be calculated accordingly.
|Click on image to go to the CAGR Tool|
Starbucks has finally opened its first store in India. Being in Mumbai, we got an opportunity to check out the store on very first day. Lucky us… 🙂
|From Starbucks (India) website|
Now, if this amount was invested on monthly basis (SIP) in a good mutual fund scheme, then assuming 15% pa growth, the amount would have become Rs 1.65 Lacs in 10 years. You can calculate the same yourself by using a SIP Calculator.
|A Snapshot from SIP Calculator (Source: HDFC MF)|