I’m a 31-year-old in a Central government job and am considering embarking on the MF bandwagon. I make around ₹57,000 a month after deduction for NPS from the employer and my end (voluntary contribution to Tier-I) as well as deduction for the Central Government Health Scheme (CGHS). I’m a frugal person and I intend to invest ₹40,000 every month, including ₹4,000 a month in NPS that I am already investing in voluntarily for deduction under Sec 80CCD 1(B). My NPS corpus thus far is about ₹4 lakh (Moderate Scheme-HDFC PFM). Other than that, I have about ₹11.5 lakh in NPS Tier-II (60:30:10 across asset classes E:G:C) and FDs of ₹10 lakh. For investing the remaining ₹36,000 in mutual funds every month, I have shortlisted these funds: ₹10,000 each in UTI Nifty 50 Index Fund and Nippon Small Cap and ₹8,000 each in Parag Parikh Flexi Cap and Kotak Emerging Equities.
Am I okay to go ahead with these or should I tweak my portfolio? I want to stick to only around four-five funds. My objective is long-term wealth creation, to build a corpus of around ₹20 crore in the next 30 yrs. I am a bachelor and have no dependents. Even if I do get married, I don’t intend to have kids.
Aditya Kumar Jha
We have assumed you want to build ₹20 crore in 30 years through mutual fund investments.
Your fund choices are good, ranging across categories such as large-cap, flexi-cap, mid-cap and small-cap. The three active funds (UTI fund is a passive one) are rated either 4-star or 5-star by bl.portfolio Star Track MF Rating. While most of your fund choices indicate a high-risk appetite, it is justifiable given your young age and a 30-year time to goal. Today, the 10-year SIP returns of your fund choices (direct plan) stand as follows:
UTI Nifty Index fund – 13 per cent
Nippon Small Cap – 24.3 per cent
Parag Parikh Flexi Cap – 18.8 per cent
Kotak Emerging Equity – 19.8 per cent
However, you cannot assume that these funds will deliver similarly over the next 10/20/30 years. For long-term goal-based investing, a 12-15 per cent CAGR is a more prudent assumption. For argument’s sake, if you are doing SIPs of ₹36,000 a month over the next 30 years and your investments give you a 12 per cent CAGR, you will have a corpus of only ₹12.7 crore at the end of the period. If you peg up the annual returns to 15 per cent over 30 years, you will be comfortably sitting on a ₹25-crore corpus. You can use readily available online SIP calculators to tweak the investment amount (step-up SIP calculators also available), time to goal and return expectations to get an idea.
Your decision to invest in pure equity funds for this goal also bodes well in the backdrop of your NPS Tier-I investment, which may tilt towards debt. Going by the information shared, you are a Central government employee and are under the moderate scheme. Here, maximum investments in equity will be 50 per cent until you are 35 and progressively reduce each year and stand at 10 per cent by the time you are 55-60. We assume that your voluntary contributions to Tier-I too is being invested in the same ratio, though your NPS Tier II contribution has a 60 per cent allocation to equities. Besides, you have FDs too, on the debt side.
While the Tier-I contribution can be used to supplement your post retirement needs, use your Tier-II for sub-goals within the 30-year period and for any emergencies since there are no withdrawal restrictions for Tier-II account.
As a government employee, your Tier-II contribution (with a lock-in of three years) as well as the amount your employer deducts every month towards NPS from your salary is eligible for deduction under 80C. Your additional voluntary contribution is eligible for additional ₹50, 000 deduction under Sec 80CCD 1(B). However, if tax saving alone has been the motive, keep in mind that under the default new tax regime or if you choose the new regime because your tax outgo is lower, you will not enjoy the tax breaks on investment in NPS. That said, NPS is still a worthy vehicle for long-term saving.