THE CASE:
I want to build Rs. 1 Cr in the next 25 years. Currently invested in mutual funds to achieve the same goal are: HDFC Sensex (Rs 10,000), Mirae Asset Emerging Fund (Rs 5,000), Parag Parikh Long Term Equity (Rs 5,000), Axis Mid Cap (Rs 3,000), SBI Small Cap (Rs 2,000), HDFC Gold Fund (Rs 2,000) and Nippon Liquid Fund (Rs 3,000).
THE SOLUTION:
I assume that this is Rs 30,000 monthly SIP you are doing.
Asset Allocation: Domestic equity: 74.3%, International equity: 5.1%, Fixed income (incl. cash): 13.8%,, Gold: 6.7%
With an investment horizon of 25 years, the overall asset class allocation in your portfolio is fairly placed, with 74% in domestic equities.
However, investment in gold and liquid fund are not essential for this goal, but can be allocated to other identified goals, if any that can be categorised as Short term, Medium Term and Long Term. Please make sure that you also have adequate emergency fund, health, and life insurance as well.
Equity Fund Allocation: Large cap: 69% Mid cap: 24% Small cap: 7%
There is a reasonable split between various market caps, with respect to your stock holdings. For a 25-year horizon, you can continue to maintain around the same allocation, but need to keep monitoring the funds and take appropriate actions when required. As you start approaching your target date for investments, say when you are 2-3 years away, start reducing your equity allocation and shifting to less volatile asset classes such as fixed income. This helps better preserve the value of your investments closer to the target date.
As per the current SIP amounts and time horizon, you should be able to comfortably meet your target corpus of Rs 1 Cr after 25 years with adequate buffers.
But you should also factor in inflation as Rs 1 Cr down the road, 25 years to be exact, will have the purchasing power equivalent to Rs 23.30 lakhs today, assuming 6% inflation. So, revisit your goal if it is not in line.
Common Portfolio Holdings: Use the numbers to understand the portfolio overlap of stocks. For example, HDFC Index Sensex and PPLTE have an overlap of 0.19. This means that 19% of the portfolio is common between the two funds. Higher the overlap lower gets the diversification.
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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