Mutual Funds

Fund Query: Factor in inflation while setting financial goals

Parvatha Vardhini C | Updated on February 20, 2021

I am 39 years old and a doctor by profession. I started investing in mutual funds and bluechip stocks from January 2021. I have invested ₹5,500 in DSP Midcap, ₹5,000 each in Axis Bluechip, Parag Parikh Flexi Cap and Axis Mid Cap, ₹500 in Axis Long Term Equity, and ₹1,000 in SBI Equity Hybrid. I have an SIP of ₹2,000 a month in SBI Small Cap. Thanks to BusinessLine Portfolio Star Track MF Ratings for helping me choose. I plan to withdraw from DSP Midcap and SBI Equity Hybrid if the ratings drop further. How can I calculate how much to invest per month? Here are my goals: retire by 65: ₹1 crore; education of two kids, 18 years from now: ₹2 crore; and their weddings, 25 years from now: ₹1 crore. I would appreciate if you can tell me how to set goals, because what I have set is very arbitrary.

Dr N Karthik

Apart from the SIPs in SBI Small Cap, we understand that you have made lump-sum investments in the rest of the funds mentioned. But for goal-based investing, a better way to build wealth is to invest money regularly in the form of SIPs for a certain number of years.

Since you have mentioned that you have goals such as your retirement, and education and wedding of kids, you can use online SIP/goal calculators to see how much you need to invest each month based on the corpus requirement and time to goal. Based on this, you can set up a separate set of SIPs for each goal, taking into consideration your risk appetite.

For instance, for your retirement, you have 26 years to get to the ₹1 crore that you have mentioned. Assuming an annual return (CAGR) of 10-12 per cent, this implies you will have to invest a monthly sum of ₹5,000-7,000 from now on for the next 26 years, in order to reach the goal. A return of 10-12 per cent is a fairly decent one to expect from long-term investment in equity-oriented mutual funds.

Similarly, for the education goal of ₹2 crore, 18 years from now, you need to invest ₹26,000-33,500 a month, from today.

For the ₹1-crore wedding goal, you need to invest ₹5,300-7500 a month, from now on. In all, these goals would involve a monthly outgo of ₹36,300 (assuming 12 per cent annual returns) to ₹48,000 (10 per cent annual returns) towards SIPs from your side.

Closer to each goal, you can move the funds to safer instruments such as fixed deposits in order to protect the capital as well as the gains made.

Staying invested in the stock market until very close to the goal is not a good idea as a downturn at a time when you could be withdrawing the funds can wipe out your returns as well as erode your capital.

That said, the larger question, as you have rightly raised, is whether this amount that you have fixed is enough. This can be decided based on what the outgo could be if you were to incur the expense today, and then applying a rate of inflation to it from history, as well as expected future cost increases.

For instance, if your current lifestyle involves a monthly expenditure of ₹50,000 and the long-term inflation is assumed at 5 per cent (RBI targets a 4-6 per cent inflation band), the monthly expenditure will grow to ₹1.78 lakh by the time you retire at 65.

Of course, the expenditure will be a moving sum as you age, considering the needs of the family. After you retire, you may even give up on many expenses.

You can take the services of a financial planner to chalk out a strategy based on your needs and aspirations, and step up your savings, if needed.

As far as the funds you have invested in go, all except DSP Midcap and SBI Equity Hybrid are rated five-star by BL Portfolio Star Track MF Ratings. These two schemes are rated three-star. You can start your monthly SIPs among the funds you have chosen itself.

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Published on February 20, 2021
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