MF Query Board

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Which mutual fund SIP is good for the long term? My age is 35 years and my salary is around Rs 20,000 per month. I want to buy a home worth Rs 10 lakhs in the next five years.

- Sushil Maurya

We appreciate the fact that you are pretty much clear about what you want from your investments. So, let us first begin by understanding how much you might require for buying a home five years from now. Inflation is one such factor that reduces the purchasing power of money over time. Therefore, while planning for your dream home you should also account for inflation. Let us assume that the inflation of a residential property is around 7 per cent. Therefore, your inflation-adjusted amount would be Rs 14.03 lakhs for the same house five years from now. As we are unaware of your risk appetite, we are assuming that you are a moderate risk-taker and would prefer to allocate 50 per cent towards equity and 50 per cent towards debt.

Assuming the rate of returns on equity to be 10 per cent and that of debt to be 8 per cent, your total monthly SIP amount works out to be Rs 18,600 of which Rs 9,100 would go towards equity and Rs 9,500 towards debt. Practically, this SIP amount is not viable for you as it will eat up over 90 per cent of your monthly income of Rs 20,000. Though you may increase the allocation towards equity or even assume higher expected returns on equity, it will make no big difference. Now let us do a reverse calculation to understand how much you can actually invest and accumulate over the mentioned investment horizon of five years.

Here we assume that you at least require Rs 12,000 i.e. 60 per cent of your monthly income for covering your expenses along with accounting for margin of safety. The remaining amount of Rs 8,000 is something that you can invest by setting up a SIP. If we assume on a conservative basis that your income grows by 5 per cent, then certainly you can cumulatively increase the SIP amount as well. This means that if you are starting off with Rs 8,000 per month, then next year you would be investing Rs 8,400 per month i.e. 5 per cent of Rs 8,000. In the third year you would be investing Rs 8,800 each month and so on until the end of five years.

Further, if we look at the accumulated amount after five years then it comes to Rs 8.63 lakhs which is almost 38 per cent less than what you aspire to have. Therefore, in this case we would recommend, if possible, deferring your goal for a further four years which would increase your goal tenure to nine years and inflation-adjusted goal amount to Rs 18.38 lakhs. Continuing the same step-up SIP for additional four years, you would end up accumulating Rs 19.13 lakhs at the end of the ninth year, which would be Rs 74,800 more than what you need. However, if you do not wish to defer your goal, you can opt for a home loan for which you can assume the accumulated amount as down payment while the balance amount can be paid through EMIs.

I want to start a monthly SIP of Rs 50,000. Please guide me on how to build a MF portfolio. How many funds should be there in a portfolio? And in which fund should I start a SIP for the long term?

- Yogesh Wattamwa

In order to build a mutual fund portfolio, you first need to assess your risk appetite. This is because your risk appetite would help you select the right mutual funds. Further, you have not mentioned the purpose of your investment which also aids in deciding which mutual funds would suit your requirement. Therefore, we would urge you to first define purpose of your investment and also assess your risk appetite before investing. However, just to give you an idea, if your risk score comes out to be moderate, then you are better off investing 50 per cent in equity funds and 50 per cent in debt funds. However, if your risk appetite is aggressive, then you can notch your equity allocation to 70 per cent and bring down debt to 30 per cent. However, if you are assessed to be a conservative investor, then it makes more sense to invest 30 per cent in equity and 70 per cent in debt. This allocation is purely from a broader asset class perspective.

When it comes to getting insights into which sub-asset class within equity and debt you should invest in, it is quite personalised and no one size fits all. Regarding the number of funds, our research shows that most investors require no more than eight funds in a single portfolio. Moreover, you should ensure that you also diversify across fund houses. Wherever possible, reduce dependency on a single fund house. As for the SIP, as said earlier, there is no one size that fits all. If you are a conservative investor then for the long term you can either invest in an index fund or in flexi-cap fund. However, if you are an aggressive investor then you can divide your SIPs between mid-cap and small-cap funds.