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How much and with what frequency should I invest in MF to enjoy power of compounding

I will soon start earning 1 lac per month. I am 31, Male. I have responsibilities of my parents health cum life insurance, my childs education, and retirement income +1 BHK house in Pune. I know I can make significant benefits if I plan for next 30 years but not sure which one is not feasible requirement and which one IS considering above MF's. I selected DSP black rock balanced fund, SBI blue chip and HDFC Top 200 funds as I believe its not good to put all eggs in one basket. You are also right in saying, product may fail but concept can NOT. How much and with what frequency should I invest in MF, so that I could enjoy power of compounding. Desperately looking forward to hear from you soon and keep posting superb articles !! Thanks.

Feb 27, 2016 by Vaibhhav, Noida  |   Mutual Fund

Thanks for your appreciation. It encourages us to continue to create content that you can find useful to make financial decisions. As far as your query is concerned, you should first ensure that you have adequate life insurance. Our lives are unpredictable and an unfortunate death will cause not just emotional distress, but also a lot of financial stress to our families. Term life insurance plans are the best life insurance plans, because these are straightforward protection plans and you can get adequate life insurance at a much lower cost, leaving sufficient investible surplus that you can invest towards your long term financial goals. We have discussed how to select term the right life insurance plans in our article, How to select the best term life insurance plan for you. Once you have enough life insurance you can start focusing on other financial goals.

You said you have responsibilities of your parents. You should ensure that you buy sufficient health insurance for them, so that their healthcare needs are taken care of (please see our blog post, Best Health Insurance Plans for Parents who are Senior Citizens). Even if you and your family (including parents) are covered under your employer’s group health insurance plan, it is always prudent to review if the health insurance plan of your employer provides comprehensive coverage for all your family’s healthcare needs, particularly with respect to exclusions (especially if your parent’s have pre-existing medical conditions) and empanelled hospitals for cash-less transactions in the city / town where your parents live. If your employer’s group health insurance plan is not adequate for your family’s healthcare needs, you should buy additional Mediclaim plan for your family. It is not clear what you mean, when you say you are responsible for your parent’s life insurance. In Advisorkhoj, we believe that, life insurance is a protection against loss of income in the event of an untimely death. We think that, you do not need to buy insurance cover on the life of your dependents, because in the event of an unfortunate death there is no loss of income. Life insurance costs money. The money spent on premiums of life cover of dependents can be better spent on investments which increases the income for your dependents. However, it is very important to note that, if you have dependents you should ensure that you have enough life insurance so that the income needs of all your dependents (including parents) are taken care of in the event of your untimely death. Please note that we have made the assumption here that, your parent’s are retired and do not have income from their professions. If they have income from their professions, then they/you should also buy life insurance cover for themselves to take care of their dependents in the event of any loss in income due to an untimely death. We have belabored this point a bit, so that you can understand why, for whom and how much life insurance to buy.

Let us come to your long term financial goals, viz. retirement planning, children’s education and house purchase. Each of these goals have different investment horizons. You have not provided sufficient information with respect to how much you need for each of these goals. You can use our goal setting tool, Goal Setting Calculator to calculate how much you need to save. Please also check out our tools, Composite Financial Goal Planner Calculator and Retirement Planning Calculator. These tools can give you a sense of how much you need to save to achieve your financial goals. One question that we are often asked is, how much returns can be expected in the future. Over the past 20 years or so, top performing diversified equity funds (e.g. Reliance Growth Fund, Franklin India Prima Plus, HDFC Equity Fund etc) have given 18 - 23% compounded annual returns. Can the same returns be expected over the next 20 years? The conservative answer is, no. As inflation moderates, the returns expectations should also moderate. As an economy matures, the expected inflation should moderate over time. Over the past 20 years, the average annual CPI inflation has been around 7.2%. If we expect long term inflation to moderate around 3 to 4%, then the long term returns from equity funds will be that much lower. We are not saying that, you will not get 20% annualized returns over the next 20 years. If you get those returns it is great for you. But perhaps, it would be more reasonable to moderate your returns expectation by 3 to 4% compared to what we got over the last 20 year, when you calculate how much savings you need to make to meet your financial goals. With regards to the frequency of your investment, it should always be aligned with your cash-flows. For a salaried person, it is best to invest on monthly basis through systematic investment plans (SIPs). If you can define clearly your financial goals in quantitative terms, using our calculators and assumptions with respect to inflation and returns expectations, you can get an estimate of how much to save and invest. You can also take the help of a financial planner to determine how much you need to save and invest for your long term financial goals, as well as for life and health insurance. We, in Advisorkhoj, are not big believers in thumb rules. We think that your financial plan should be specific to your own needs and expectations. However, just for the purpose of reference, we can refer to a commonly used thumb rule in the US, which is the 50 – 30 – 20 thumb rule. This rule suggests that, 50% of your salary should be spent on necessities (e.g. food, house rent / EMIs, fuel, utilities, life and health insurance etc), 30% of your salary can be spent on discretionary or one- off items (e.g. travel and entertainment, one off luxury items, credit card balances on non essential items, EMIs of car loans etc) and the balance 20% on investments for long term goals.

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