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I am 35 years old and plan to invest till I turn 60. I have started investing ₹32,000 in mutual funds (MFs), including mid and small cap funds since 1 March. Is this the right allocation?
— Somiya Chakravorty
Your first step towards building a long-term corpus by investing regularly through SIPs is right. If we assume an annual return of 10%, then you will be able to accumulate nearly ₹4 crore after 25 years with the monthly investment of ₹32,000. If you are considering this as your retirement corpus, then you should try to evaluate how much you would need on retirement to take care of monthly expenses in the post-retirement phase. The corpus of ₹4 crore will help you withdraw ₹1.60 lakh per month from the age of 56 to 85 years. This includes annual inflation of 6% post-retirement.
If we look from a purchasing power perspective, ₹38,000 today with inflation will be ₹1.60 lakh after 25 years when you plan to retire. Hence, I suggest that you evaluate your retirement needs as ₹4 crore may not be a sufficient retirement corpus.
You are trying to invest across different categories of MFs and the allocation towards mid and small-cap funds is 20%. You may like to keep this allocation to 20-25% in the future as large & mid-cap and flexi-cap funds also invest a part of their portfolio in mid and small-cap companies. The funds you are investing in are good and you can continue with them for the long term. If you are following the approach of investing just in top-ranked funds within the category, then I would suggest you to consider how the funds have been performing during different market cycles (long-term) along with their portfolio characteristics. This will help you make a more informed decision.
At present, your overall fund list looks slightly over-diversified as you are investing in three different tax-saving funds (ELSS) where the annual investment exceeds the 80C limit. You may try to restrict ELSS investments up to ₹12,500 per month and invest in other diversified equity funds chosen by you.
Harshad Chetanwala is co-founder at MyWealthGrowth.com.