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Investment plan for 5 years!

Carlos Slim had said, “Anyone who is not investing now is missing a tremendous opportunity.” He is right. How often do we think about investing our money for the goals we wish to achieve? One of our esteemed clients, Mr. Rahul Kumar, had sent in his query regarding an investment plan he wants to pursue. He is targeting to buy a house at the current value of Rs 70 lakhs with an investment plan for 5 years. He is a 31-year-old government employee. His monthly salary is Rs 60,000. We also seek to study if this goal is realistic or not.

He is single and has 3 other members. He has a monthly expenditure of Rs 40,000 which is inclusive of the household expenses, education of his sibling, and personal expenses.

The following is the query he has sent us. Our team of experts has answered him in detail.

I am a 31-year-old government employee. I am currently investing in the following funds for the last two years:

  • Canara Robeco Equity Hybrid Fund Regular-Growth: Rs 3,000
  • DSP Banking & PSU Debt Fund - Direct Plan - Growth: Rs 4,000
  • SBI Blue Chip Fund – Growth: Rs 4,000
  • Axis Multicap Fund – Growth: Rs 3,000
  • SBI Magnum Constant Maturity Fund Regular Growth: Rs 3,000

I am investing Rs 1.5 lakh annually in PPF for the last three years.

I want to purchase a house with a current value of Rs 70 lakh in the next five years. Please suggest me an investment plan to achieve this goal. I am willing to take high risks. 

Currently, I am investing Rs 18,000 per month in the above-mentioned five mutual funds.

 

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It is indeed a pleasure to hear from you, Mr. Kumar. You have not mentioned whether you wish to start a fresh investment or use the current investments to meet your goal of buying a house.

Assuming different annual returns, let's see how much monthly investment you need to make Rs. 70 lakhs after 5 years:

  • A 10% return would also require a monthly investment of Rs 92,000.
  • A 12% return would also require a monthly investment of Rs 85,000.
  • A 15% return would also require a monthly investment of Rs 78,000.
  • A 17% return would also require a monthly investment of Rs 73,800.

However, as your salary is Rs 60,000, it will not be possible for you to invest such an amount.

In our considered opinion, you should do two things. Firstly, start saving and invest aggressively in selected funds. Save as much as possible. Subsequently, put aside money for contingency funds and insurance and invest your rest of the money. Also, ensure that you invest more with an increase in your salary. Secondly, keep a slightly longer outlook to buy the house.

Moreover, do not go after returns if you are investing for a period of 5 to 7 years. People often end up investing in high-risk options like small-cap schemes and mid-cap schemes. The chances of losing money are pretty high in these schemes. They also offer higher returns. Invest in these high-risk schemes only if you have a longer outlook of 7 to 10 years.
If you want to invest for the long term and also save tax, click here to check the top 5 tax saving funds to invest in!

Investment plan for 5 years

For an investment plan for 5 years, you should consider investing in a dynamic asset allocation fund. For the sake of clarification, I wish to briefly mention the various funds which can help you in making the right decisions.

Furthermore, dynamic asset allocation funds are a type of balanced fund which works on strategically switching to equity and debt markets based on market conditions. The fund shifts the investments to the debt market when the equity market is on a high. This helps avoid losses and book profits if the market goes through a correction and falls to a level after being overvalued. It can prove ideal for an investment plan for 5 years as it can garner the targeted amount.

When the debt market is high the investments shift to the equity market on the contrary. This helps in getting an advantage from the stock price appreciation of equity stocks. Thus, this fund works on the principle of ‘buy low and sell high’ and helps the investors make considerable profits. They are highly diversified funds and also invest in real estate and bonds and help the economy directly.

Large-cap companies are listed in the top 100. They have a market capitalization of more than Rs 20,000 crore. These are quite old companies and have generated moderate but stable returns for investors. Subsequently, the risk profile for these companies is quite low.

Going ahead, mid-cap companies have a market capitalization between Rs 500 crores and Rs 10,000 crores. These companies are ranked between 101 and 250. During a positive market cycle, these funds tend to perform better than Large-cap funds but also are susceptible during a negative cycle where they run the risk of losing a huge amount.

Investment plan for 5 years

Finally, companies that are ranked after 250 in terms of market capitalization are called small-cap companies. These are relatively newer companies and also have a market capitalization of less than Rs 500 crore and are traded in public. Moreover, the mutual funds which invest in these companies are termed small-cap funds. Small-cap funds however are susceptible to market movements. They can give a huge return in a positive cycle or an equally huge loss in a negative cycle.  The risk profile for such companies is quite high.

You might be curious to know the amount of taxes you might incur on these funds. When you redeem units of these funds, you earn certain capital gains. These capital gains are taxed as per the holding period. If it is less than 1 year, they can be taxed at 15%. If the holding period is more than 1 year, no taxes are charged up to gains of Rs 1 lakh.

To conclude my assessment, you should continue investing in these options with a long term view. Focus on savings and aggressive re-investing. Meanwhile, it will also be wise to generate a secondary source of income if possible. Doing so can help you implement your investment plan for 5 years and help you in achieving your goal for a dream home!

This was an excerpt from the reply our experts have given to one of our clients. Get your queries answered as well! You can mail us at [email protected] or drop us a call on +91 9315530832.

 

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