SIP vs Lump Sum Investment: Investment is a habit one should embrace from an early age. One can start investing when they get their first salary. Once you regularly invest for a few years and returns get reflecting in your online portfolio, you get more interested in investing and develops it as a habit. Early investment is a good habit but equally important is targeted investing. Before you make an investment, ask yourself what are your financial goals, how to you want to achieve them, and will you be able to achieve them in a stipulated timeframe? Considering your age and income, you can achieve the target to build a particular corpus in a certain time limit.
E.g., you can set a target of achieving a Rs 10 crore retirement corpus, or getting a particular monthly pension post retirement.
However, if you want to create a sizeable corpus in the short duration, you need to do aggressive investing.
For that, you need to start early and invest a large amount every month.
With that strategy, you may also build a Rs 1 crore corpus in just 5 years.
Mutual fund investment can be an effective way to build a Rs 1 crore corpus in five years. Know how it is possible.
How to build Rs 1 cr corpus in 5 years though SIP investment
Naveen Kukreja, Co-founder & CEO, Paisabazaar, says that assuming an annualised return of 12 per cent, one needs to invest Rs 1.20 lakh per month through the SIProute to get a Rs 1 crore corpus.
How to reach Rs 1 cr corpus in 5 years through lump sum investment
Kukreja says for that, an investor would need to make a lump sum investment of around Rs 57 lakh in equity mutual funds, assuming an annualised return of 12 per cent.
How to reach Rs 1 cr corpus in 5 years through SIPs in debt funds
Kukreja says since debt funds usually generate lower returns than equity funds for investment horizons of 5 years or more.
Thus, assuming an annualised returns of 7 per cent from debt funds, an investor would need to invest Rs 1.40 lakh per month through SIP to create a corpus of Rs 1 crore in 5 years.
What should be the strategy to reach the Rs 1 cr goal?
Kukreja says the investment strategy for any investor would depend on their investible surplus, age, risk appetite and investment horizon.
E.g., the equity allocation for an investor with low-risk appetite and/or nearing their retirement age would be lower than a young investor having high-risk appetite.
He says for investors who are young, have adequate comfort and appetite for equity investing along adequate investible surplus, he would suggest an equity-debt asset mix of 8:2 in their monthly investment contributions.
As different asset classes rarely move in tandem, a diversified portfolio through a mix of asset classes would help reduce the risk to the investment portfolio.
Assuming an annualised return of 12 per cent, an SIP contribution of Rs 1.04 lakh per month in equity mutual funds would create an equity corpus of around Rs 85 lakh in 5 years.
On the other hand, a monthly contribution of Rs 26,000 in debt funds, assuming a pre-tax return of 7 per cent, would create a corpus of about 19 lakh in 5 years.
Thus, a combined monthly contribution of Rs 1.30 lakh would create a corpus of over Rs 1 crore in 5 years.
Kukreja says an investor can split their equity SIP contributions equally between large-, multi asset, and flexi cap funds.
Suggesting funds, he says the direct plans of Parag Parikh Flexi Cap Fund and Quant Flexi Fund can be considered for the flexicap category; ICICI Prudential Bluechip Fund and HDFC Top 100 Fund can be considered for the large-cap category; and Quant Multi Asset Fund or ICICI Prudential Multi Asset Fund can be considered for the multi-asset category.
For the fixed income component, he suggests SIPs in the direct plans of SBI Long Duration Fund and HDFC Long Duration Fund can be considered.
"As long duration debt funds have the longest maturity profiles among all debt fund categories, these funds generate higher returns than other debt fund categories during a falling interest rate regime. However, the reverse would be true during a rising interest regime. Thus, once the signs of interest rate regime reaching its bottom becomes clear, one should steadily shift his existing investments in long duration debt funds and fresh debt fund contributions to ultra-short duration debt funds," says Kukreja.
While selecting the ultra-short duration funds, one should prefer the ones having highest exposure to government bonds, PSU bonds and AAA-rated corporate bonds, Kukreja sums up.
