I recently met a younger cousin who had turned 30 and got married a year back. He told me that while he did save some money using traditional fixed income options, he had never invested in mutual funds (MFs). This is usually the case with many of us who start investing for the first time. And this is especially true for people in their 30s, 40s and even the 50s. These generations of investors weren’t largely exposed or encouraged to invest in MFs.
Life insurance policies usually tend to become our first investment, thanks to the friendly neighborhood insurance agent, who is sometimes even our family member. Meanwhile, my cousin was also one of those who had not invested in MFs so far. And now, he wanted to start. He had a surplus of Rs 50,000 per month.
Also read: Four classic insurance traps you must avoid
To be sure, the other fixed income investments we’re talking about here are Employees’ Provident Fund (EPF), Public Provident Fund (PPF) and bank fixed deposits (FDs). I asked him why he suddenly got interested in MFs. He told me that he had seen his colleagues in office invest in equity MFs mutual funds for the last few years and they had done reasonably well. So, this got him interested.
Also see: MC30 List of top funds
Tasks to complete before you jump into MFs
Do not just start investing in MFs from day one. Although MFs are one of the best regulated instruments in the financial markets, there are a few things to be done first.
Like I generally do with everyone, I asked my cousin, if he had proper life and health insurances, as these should be handled first before one starts to invest. He said he had them via a Rs 2-crore term plan and a Rs 20-lakh health insurance.
With that settled, I asked if he had any buffer for uninsured contingencies. He confirmed that he had Rs 5 lakh parked in a bank FD as an emergency fund, which was enough for about six months’ worth of monthly expenses (of about Rs 75,000 per month).
So, it was clear that he had taken care of the basics and was ready to begin investing properly and in proper age-appropriate assets.
What are you investing for?
This is an important question that all investors must ask themselves, before putting in their money.
He was not very sure initially, but eventually said that he wanted to purchase a house for about Rs 1 crore in six to seven years’ time, and also wanted to save something for retirement. Since he got married recently, he was yet to begin his family planning journey (and related goals for his children’s future).
I know that starting the investment discussion with goals is a boring way to do it. But it is the right way, since that is the only way to go about picking the right assets and instruments for investments.
Anyway, it was clear he had a short-term goal of a down payment for a house in six to seven years’ time and one very long-term goal of retirement in about 20-25 years.
Now the down payment for the house requires 15-20 percent of the cost of the house, (i.e., about Rs 1 crore). This turns out to be Rs 15-20 lakh. To accumulate that in six to seven years, he needs to invest Rs 17,000-23,000 per month assuming he invests primarily in debt funds earning close to 7 percent.
I told him that he should invest about Rs 20,000 per month for the down payment of the house in a debt fund. Since he had a total surplus of Rs 50,000, he would then have Rs 30,000 left over for beginning his investment towards the goal of retirement.
For investments towards retirement, I suggested that since he was already investing in debt instruments like EPF (and VPF), PPF, he could use the remaining surplus of Rs 30,000 per month to invest in equity funds.
For long-term goals like retirement, a larger equity component is advisable as it helps generate inflation-beating returns. But in the short-term (like for the goal of down payment for house), equity can be quite volatile, and hence, short-term goals are best handled by debt in the portfolio.
Which MFs to invest in?
Here is what I suggested based on his two goal buckets:
-House down payment - Rs 20,000 per month in one or two funds from debt fund categories like Short Duration / Conservative Hybrid funds.
-Retirement - Rs 30,000 per month has to be invested. This can be distributed as: Monthly SIPs of around Rs 10,000 in large-cap index fund, Rs 15,000 in Flexicap / Large & Midcap* fund, and about Rs 5,000 in Midcap funds. It is reminded that we invested the full surplus here in equity funds as the debt side is already handled via EPF, PPF, etc. for my cousin.
*If there is a need to save taxes also, then one can pick a diversifed ELSS fund as well which fits well and complements other MFs in the portfolio.
Also read: MC Explains | The difference between debt duration fund and duration call. Choose wisely
So, that is how someone in their 30s can look at starting their MF investments if they still haven’t. Most investors get introduced to MFs via ELSS schemes. But as we discussed above and if one has his/her goals clear, then it’s possible to plan and build your MF portfolio correctly from the first day itself.
The 30s are a peculiar phase in life as you are neither very young nor old. So, the financial decisions that are made during this decade have a big impact on how the rest of your financial life will pan out.
