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How to invest for short and long term financial goals

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I am planning to invest in mutual funds. I am a beginner but I have gone through all the information on how mutual funds function. I have defined my scope and horizon. I have requirements of both short term and long term goals to fulfill. I am looking to achieve 2-3 lakhs to fulfill short term goals within 1-2 years horizon and 50 lakhs to fulfill long term goals, having more than 10 years horizon. I am ready to invest a lumpsum of 1 lakh, and in SIPs thereafter. Suggest me on how should I allocate my money to various funds in my portfolio and recommend various funds (equity, debt, hybrid) to start with. For now I am thinking to go ahead with Parag Parikh Long Term Equity Growth Fund for long term goals and Axis Small Cap Fund Growth. I earn Rs60,000 net and have an EMI of Rs25,000 to pay per month and I am 27 years old. Because of the house loan, I already save tax and ELSS fund is not required.

-Name withheld

Answer by Harshad Chetanwala, founder, Mywealthgrowth.com

It is good to know that you have already done the hard work of understanding mutual funds. At the same time your clear visibility of short term and long term goal will help you create the right investment plan.

First, let us look at your goal of Rs3 Lakhs in two years. As this goal is for short term, you can invest in short duration debt funds for it. You can also invest the lumpsum of Rs1 Lakh for this goal in debt funds. Along with the lumpsum, you will have to invest Rs7,500 per month for 2 years for this goal. You can consider investing Rs50,000 in IDFC Banking & PSU Debt Fund and Axis Short Term; and monthly SIP of Rs3,500 and Rs3,000 respectively for two years. The rate of return assumed from these debt fund is 5.50% p.a. This is an assumption and you should note that returns from debt funds are not guaranteed.

For your long term goal of 10 years, you can invest in equity funds. You will have to do SIP of Rs.5,000 or Rs22,000 for 10 years to reach the objective of Rs50 lakh considering 10% p.a. or 12% p.a. return respectively. You can consider investing in HDFC / ICICI / SBI Nifty Index Fund (20%), Parag Parikh Flexicap Fund (20%), UTI Flexicap Fund (15%), Mirae Asset Large Cap Fund (15%), Canara Robeco Emerging Equities Fund (15%) and DSP Mid Cap / Axis Mid Cap (15%). The reason of suggesting six funds is to reduce over exposure in a fund. These funds will help you diversify investment across market capitalization at the time maintain reasonable investment in large cap that has potential to do well over long run.

Usually for long term goals it is better to follow de-risking strategy where you gradually start withdrawing the accumulated amount every month a year before of your goal. This can be done by doing Systematic Withdrawal Plan (SWP) in all your funds. In case of your 10 years goal, you can invest up to the end of nineth year and start SWP from first month of tenth year. If you would like to follow this strategy, then you will have to invest Rs27,000 or Rs25,000 per month in above equity funds for 9 years assuming 10% and 12% p.a. return respectively. This will ensure that any event impacting stock market in the year of your goal does not affect your entire accumulated corpus of Rs50 Lakhs. Ideally, it is suggested following a de-risking strategy and assume 10% p.a. return at the time of planning, but if we do so you will not have sufficient amount to take care of your monthly expenses for the first two years as you have to invest Rs.7,500 per month for your short term goal and pay EMI of Rs25,000 as well.

Hence, to begin with you can start SIP of Rs22,000 for your long term goal and try to increase the SIP amount by 6% annually and invest upto the end of ninth year. This will help you to remain conservative at the same follow the de-risking strategy and most importantly reach to your goal of Rs50 Lacs in 10 years as well

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