THE CASE:
I am an NRI aged 40 having Rs. 50 lakhs lying in a private bank fixed deposit. I would like to invest it for 20 years. By then I shall return to India for retirement. How much amount I would be able to accumulate if I invest in mutual funds?
THE SOLUTION:
Non-resident Indians, or NRIs, can invest in mutual funds in India as long as they adhere to the Foreign Exchange Management Act (FEMA). However, not all Indian mutual funds accept NRI investments due to various compliance issues like FATCA, CRS, FATF, AML, CFT, etc.
Mutual funds in India are not allowed to accept investments in foreign currency.
For investing in Indian mutual funds, an NRI needs to open one of the following three bank accounts viz. an NRE (non-resident external rupee) account, an NRO (non-resident ordinary rupee) account or FCNR (foreign currency non-resident) account with an Indian bank.
Since I know nothing about your personal details and financial facts like other investments, insurances, loans, mortgages, other financial goals, etc. I shall only look at Rs. 50 lakhs as your total portfolio and assume that you are eligible for mutual fund investments in India.
For portfolio construction, an asset allocation-based approach (mix of equity, debt and other assets) should be followed as it is one of the key determinants of the portfolio’s performance. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity, which have the potential to deliver relatively higher returns compared to fixed income over the long term. One should also have some exposure to international equities, which offer diversification across geographies via exposure to different economic growth drivers and also act as a hedge against domestic currency risk.
Assuming an aggressive risk profile, given the long investment horizon till retirement, you can invest with a portfolio mix of about say 80% into equities and 20% into fixed-income.
Equity:
- 40%: Large cap
- 15%: Mid cap
- 5%: Small cap
- 20%: International
You can consider fixed income funds with a high credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, etc.
As you are approach your retirement, slowly shift equity allocation to fixed income. But a far better approach is the bucket strategy for your retirement years.
With the recommended asset allocation and investment horizon of 20 years, you would garner nearly 3 crores corpus at retirement. The amount has been calculated presuming average equity market returns of 10% and fixed income returns of 6%.
It is advisable to top up your investments whenever you have any excess savings or any windfall gains. This will help you achieve higher retirement corpus.
To evaluate mutual funds across categories, one can look at the performance charts and the analysis of select funds.
When putting a financial plan in place, one must also look at health insurance, life insurance, an emergency fund, and saving for various goals including retirement.
Disclaimer: The above may not be the only solution and there could be multiple solutions for the same case. This is only a case study and should not be construed as any kind of advice. Personal and financial situations differ for each individual. Please consult a qualified licensed professional advisor before taking any action.
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