Fund Talk

I have just started my career and save Rs 15,000 per month. Currently the bank I invest in gives an interest of 10 per cent per annum. From what I have understood about money, savings, inflation and so on I gather that 10 per cent is not sufficient. As I am new to investing please suggest what funds I should invest in so that by 2020 I have sufficient amount to buy a decent property. Please also suggest how I should keep track of the funds. (my risk appetite is medium).How much will I get approximately at the end of 10 years with this money if I invest in the funds you suggest. I have calculated that at the end of 10 years, with the 10 per cent interest I am currently getting, I will be able to save approximately Rs 20 lakh and any funds I invest in should be able to generate definitely more than this.

Mahathi

You have made a wise decision of starting to save early into your career. This would leave you with ample time to achieve several financial goals, if you are invest systematically over the long term. It is also nice to note that you are saving towards a goal. So you have a time horizon, a specific amount that you would like to set aside every month and a goal — all of which are key ingredients in achieving financial goals.

Now, the key challenge is to optimally deploy your investments. For all investors, it is necessary that a balanced approach to portfolio creation is followed. This means that you will have to build a corpus using a combination of equity and debt, while also diversifying through gold and real estate.

For the long run, it has been proven time and again that to achieve inflation-beating returns on a post-tax basis, equity should form an important part of the portfolio, more so when you are young.

The Tax angle

Coming to your query, you have stated that your bank offers you a deposit with 10 per cent interest rate. If you invest Rs 15,000 for each of the next 108 months (till 2020, when you want to buy a property) at 10 per cent, you will receive about Rs 26 lakh. But the caveat is that the (roughly) Rs 10 lakh interest that you earn as interest would be subject to tax at your tax slab.

So you might end up with a much lower sum of Rs 23 lakh. Tax thus plays a key part in the final corpus one ends up with in the case of bank deposits and other debt instruments. Of course, the related risks in debt are much lower than equities.

But if the inflation rate remains stubbornly at the 9-10 per cent-levels being witnessed now, your effective returns, adjusted for inflation, would in fact be negative post taxes.

Given that you have a medium-risk appetite and are relatively young, you must invest in mutual funds to build a healthy corpus. Given your risk appetite, we suggest you invest about Rs 3500 per month each in HDFC Top 200, Fidelity Equity and ICICI Pru Focussed Bluechip Equity.

Returns from large-cap funds

These are funds that focus predominantly on large-cap stocks. The returns generated by large-cap funds have ranged from 18-30 percent over a 9-10 year period. However, a repeat performance in current market conditions may not be easy. IT will be prudent to assume a 15 per cent return. The balance Rs 4500 can be deployed in IDFC Premier Equity or HDFC Mid-cap opportunities, two funds with an excellent track record, but that carry relatively higher level of risk than large-cap funds. Over the last three years these funds have generated 21-23 per cent returns.

But if you are completely risk averse, you can invest the Rs 4500 in HDFC Prudence, an equity-oriented balanced fund with an outstanding track record. The fund has delivered a stupendous 28 per cent returns over a 9-10 year period and can be expected to generate returns higher than large-cap funds. Even assuming conservatively that the return is 15 per cent per annum, by investing Rs 15,000 for the next nine years, you would end up with around Rs 34 lakh. The key point is that under the current tax laws the capital gains is tax free, if you sell the units a year after purchase (for SIPs it would be one year from every SIP transaction).

Much would depend on what prices properties would be available at in 2020. You can always consider availing a home loan. Ensure that you have enough surplus for your capital contribution to the property. To be safe, over the next few years, as your income rises, increase allocations to SIPs, invest in debt instruments and gold periodically, so that you achieve a healthy corpus.

Queries may be e-mailed to >mf@thehindu.co.in , or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002

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