Starting late? Be aggressive

I am 37 and plan to create a corpus of Rs 2 crore by the time I turn 55. I can currently invest Rs 6,000-Rs 7,000 a month. Can I achieve my target?

-Raju Muthuswamy

The way to wealth creation is to invest regularly in equity as an asset class through mutual funds. If you invest Rs 7,000 a month for the next 19 years and the investment earns an annualised 15 per cent, you will accumulate a corpus of Rs 77 lakh, which is way below what you desire. To reach your target, you need to invest Rs 27,500 a month in a portfolio of funds that earn an annualised 15 per cent return, which is possible.

 

I have opted for a Systematic Investment Plan (SIP) in a tax-saving mutual fund, with a monthly frequency. Since the fund has a lock-in of three years, will I be able to liquidate the total amount invested over the period in one shot?

-Amol

Investing through SIPs is a disciplined approach to investing. However, it can be tricky when investing in tax-saving funds. When investing in these, each SIP is treated as a fresh investment and each instalment needs to complete three years of holding, the compulsory lock-in period. So, if you have been investing through SIPs in a fund since January 2010, it does not mean that your lock-in period will get over in Jan 2013 and you can withdraw all of it. Only the first SIP will complete its lock-in period in Jan 2013.

I am investing Rs 7,000 a month through SIPs in different mutual funds. I can invest an additional Rs 3,000 a month. Kindly suggest new funds to add to my existing selection. I am also planning to start an SIP of Rs 1,000 in Reliance Gold Savings Fund

-Lakshmi Prasad

At 40, you are demonstrating the right temperament by investing regularly in mutual funds through SIPs. You have made a good start by selecting some good funds to build your portfolio. However, there seems to be some issue with a few funds, where thought seems to be missing in selecting. For instance, both SBI funds are not the best performing in their category. You will be better off selecting Quantum Long Term Equity, a good performing multi-cap fund instead of Magnum Contra. Likewise, you will be better with Fidelity Tax Advantage or HDFC Taxsaver instead.

You need to have a well-diversified and allocated portfolio of funds. We suggest you go with a core and satellite approach, to give your mutual fund portfolio the necessary stability and growth for long-term wealth creation. You should look at investing 70-80 per cent in the core funds such as large, large- and mid-cap funds and even tax planning funds. With the satellite comprising sector, thematic funds and mid- and small-cap funds. This way, the core will take care of stability and the satellite helps your portfolio earn the necessary push to improve the performance of the overall portfolio. Increase your allocation to HDFC Top 200, BSL Frontline Equity and add a large cap fund such as DSPBR Top 100 or IDFC Imperial Equity Plan A. My mutual fund portfolio is showing positive gains. Should I book profits?

-Radha Shenoy

First, you need to ask yourself what you plan to do with the booked profits? If you are thinking of investing it again, ask yourself why did you invest in the funds where you plan to book profits.

Investing should be done with a financial goal.The accumulated funds should be used to meet the goal. If you have to re-invest the profits, you may end up investing in the same funds that you booked profits in. There is a lesson from this experience for you: invest with a goal and book profits only when there is a new or compelling idea in which you wish to invest the gains.