In my previous post, I discussed about how should we plan for our long term goals. This post is going to focus on how to invest for our long term goals. Its never late to start investing for our goals. If incase, you haven’t started, then its time for you to plan your investments.

Let’s see where we can put our money to grow. We often hear people saying that money should make money while we sleep. It can happen only when you deploy your money in the right asset which beats inflation. 100 rupees that you have today will value less next year due to inflation. To catch up, we have to deploy our capital where the value increases over time. This can be a debt instrument like your bank FD, stocks and mutual funds, real estate that give rents, etc. Each of these has its own characteristics.

1. Debt – Safe with less returns. Chance of beating index is marginal.
2. Stocks – Volatile with high returns if you have mastered. High change of beating index with good margin in long term.
3. Mutual funds – Volatile with good returns. Good change of beating index on long term.
4. Real estate – Safe and moderate returns. Asset value plus rental will beat inflation for sure but you need a lump sum amount.

Since we are going to systematically invest for our long term goals, we can remove the real estate from this list since it requires a large sum. If you are good at stock picking, we can choose that but as per stats majority of the individual stock investor loose money and its not advisable for everyone. So I will remove this also from the list. We are left with only two options, Debt and Mutual funds.

Since most of our long term goals have a time horizon of 15 years, I would recommend Mutual funds for reaching our goals with lesser amount. If you are risk averse, you can choose to invest 70% of money to mutual funds and 30% of money in debt instruments.

Best Debt options ?

PPF and Sukanya Samriddhi Yojana (only if you have a girl child ) are two best option for debt instruments. They give around 7 to 8% interest. PPF has a lock in of 15 years and SSY has a lock in of 21 years from the year you open the account. If you have a male child, you have the option to choose only PPF. Don’t worry, there is an option for debt funds in mutual funds too.

Mutual fund options ?

There are multiple mutual fund options and its always a nightmare to choose the mutual fund to invest for long term. Before talking about how to choose the funds, I will try to filter the funds that we should not pick. Don’t pick Sectoral funds where you have to be skilled enough to know which sector will perform when. I would rather give this freedom to my mutual fund manager to choose the sectors. If incase, you want to deploy your money purely in equity, then ignore the balanced, hybrid kind of funds. Finally, we will end with the below funds

1. Large cap – Less riskier, less returns
2. Large and Mid cap – Riskier with moderate returns
3. Mid cap – More riskier with more than moderate returns
4. Small cap – High risk. High Returns
5. Flexi cap – More riskier with more than moderate returns.
6. Multi cap – More riskier with more than moderate returns (mandatory allocation to each cap)
7. Value – Choose stocks that are available at good value

Don’t invest all the money in Mid cap or small cap funds even if you are a high risk taker. Choose a max of 3 funds and not more than that. Always keep things simple which works wonderfully on long run. My preference (High Risk) is to choose

1. Flexi cap (60%)
2. Value (20%)
3. Small/Mid cap (20%)

If you are risk averse and don’t want to invest in PPF and want to invest in debt mutual funds, you can chose the below spread.

1. Flexi cap(50%)
2. Hybrid Conservative(40%)
3. Small/Mid cap (10%)

Steps to follow after deciding our risk appetite.

In previous post, we calculated that we need to invest around 74K every month to achieve all our long term goals. In the section above, we discussed how to invest the amount. Now what should we do ?

1. Choose the funds as per your preference.

Lets consider, am a high risk person and I have chosen the below funds. Note: These are not suggestions and I am using it only for explanation.

Flexi cap – Parag Parikh Flexi Cap Fund – 44,000 ( 60% of 74,000)
Value – ICICI Prudential Value Discovery Fund – 15,000 ( 20% of 74,000)
Small cap – Nippon India Small Cap Fund – 15,000 (20% of 74,000)

2. Create a SIP in these funds. Preferably in the first 5 days of the month.

I am using Zerodha Coin for my mutual fund investments and its easy to use. You can choose your preferred platform. Do let us know via comments if there is any benefit over other.

3. Make sure you are investing every month without any breaks.

Make sure this is your first expense of the month.

4. Increase the SIP by 10% every year.

Try to increase your SIP yearly. This way, it feels easy to save for the future.

5. Review the funds once in a year.

I will give a simple hack on how to review your fund. If your fund is beating the index return, then we are good. Also keep not of any change in the fund manage of our mutual fund. They are the one who is responsible for the fund’s performance. If they change, monitor the fund’s performance over next few years. If it doesn’t beat index or not among top 5 in the same category, its time to move to new funds.

6. Move to safer instrument when you are nearing your goal.

Since Equity is a high risk instrument, anything can happen anytime. We should not be taking any wrong road when we are about to reach our destination. I would prefer moving our funds to safer instruments like FD when we are couple of years away from our goals. If in case there is a market crash, then don’t do the fund movement. Historically we have seen markets bounce back in a year or two when there is a crash.

You might still have a doubt. Will it really work ?

I hope this post would have given you a good idea on how to start investing for your long term goals. If you like the contents and want to receive weekly notification on email you can subscribe below.

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