Porfolio advice - Build a broader portfolio
6/20/2011 6:56 PM Monday
I am currently investing only in fixed deposits and government savings schemes such as PPF and NSC. I now wish to allocate a fixed amount of Rs 10000 per month in mutual funds through an SIP. Can you please guide me as to the schemes that I could look out for. I am currently 38 years old and would like to plan for my sons education in future through this corpus development.
- Prashant Wale
Yes, the idea is no doubt good. Since all your present savings are in debt oriented schemes, your proposed SIP can be in equity funds. A mix of assets will be helpful in obtaining diversification and when equity is included, increase the chance of a higher return on the
portfolio. The long term gains on the Sensex have been pretty good. A few well and actively managed equity funds are presented for comparison with the index. As you can observe they have all out-performed the market index and are hence a good option as compared to an index fund. More importantly they are a great means to earn more than inflation and beat it! Since you want to save for your son’s education, these are good options if there a still a few years to go.
Inflation will have to be targeted while saving for this. With a 10% annual rate of inflation assumed, a degree that could cost Rs 10 lacs at present is likely to cost in the range of Rs 26 lacs 10 years down the line. So this becomes your target to save. If one is able to earn a 15% compounded return for the next 10 years, your SIP of Rs 10,000 should do the trick and accumulate to a similar sum!
An SIP enables monthly savings as a habit; and it also results in a regular averaging of the markets by virtue of purchases being made over a period of time and across market conditions. Since equity markets are volatile, that is, some-times up and sometimes down, the monthly SIP is a good way of buying units at all levels and averaging your price. This is a simple way to beat the markets and be a winner. But be sure to keep the following in mind and agree with, for now and forever:
- Market levels cannot be predicted for the short term but the broad direction can be perceived for the long term.
- Long term market gains can be estimated to be about 1.5x the country’s long term real GDP growth rate.
- The ride will not be smooth, that I can guarantee! You are quite likely to experience losses on your investment value in the first three years of SIPs. That is the nature of the market and one should not give up in the downturn.
- History tell us that there is a probability that you could experience losses anywhere in the region of 15% in a three year period. That is why longer horizons are required for equity investing.
- The beauty of an SIP can be experienced only if you continue buying when markets fall, because that is when you are going to be buying what you want at lower prices and getting the benefit of appreciation when the markets eventually recover.
- Do not have too many funds. For an SIP of Rs 10,000, one or two funds are sufficient, if chosen well.
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