I am 31 years old. I am completely new to mutual funds and I want to start investing through SIP. My child is one year old now and I need Rs 1 crore for his studies after 15 years. I also want to plan for my retirement and I need Rs 2 crore for my retirement. I am ready to take risk. Please guide me how things work with mutual funds and how much should I invest monthly for my goals and which funds are best for me.
A Systematic Investment Plan or SIP is a convenient way of investing in a fixed sum regularly in mutual funds, typically equity mutual funds, to meet financial goals. However, the strategy does not guarantee returns. That is why it is extremely important to choose a mutual fund category (sometimes categories) that are in line with your investment objective and risk profile. For example, if you have a conservative risk profile or you don’t want to take too much risk and deal with a lot of volatility, you should stick to large cap mutual funds. If you are ready to take a lot of risk (that means you are okay watching you investments lose value by 50 or 60%) and deal with a lot of volatility, you can consider investing in large & mid cap schemes, mid cap schemes, small cap schemes, etc.
Since you are absolutely new to mutual funds and do not understand much about investment basics, you should seek the help of a mutual fund advisor. You can ask for references from your friends or colleagues for a reliable mutual fund advisor. You should preferably opt for a mutual fund advisor who charges a fee for advice than a mutual fund distributor who would offer you free advice. An advisor earns money from you, whereas a distributor earns money from the mutual fund.
Do not choose random numbers like Rs 1 crore and Rs 2 crore for your long-term financial goals. Such a strategy wont ensure that you meet all your goals. For more, read: Why Rs 1 crore will not ensure a comfortable retired life?
Always start by identifying goals. Find out the current cost of those goals. Find out the future value of the goals by using a realistic inflation number. For example, if your child’s college education costs around 50 lakh now. It will cost around Rs 1.38 crore after 15 years when you account for an inflation of 7% per year. Once you know your target corpus, you can find out how much you need to invest every month to create your target corpus. In this case, you need to invest Rs 27,350 every month. We have assumed an annual return of 12% on investment for the calculation.
Note, this is a rough calculation. Ideally, you should not invest equity schemes until your goal. Also, you should shift the money from equity schemes to safer avenues like debt schemes or bank deposits at least three years before your goal. We also haven’t included the long-term capital gains tax in our calculations.