An Investment for Each Priority

Nitin Agrawal
Nitin Agrawal
nitin@orowealth.com
beta in mutual funds
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We often come across the advice from parents, teachers that says – Know your priorities! People tend to think that young investors generally don’t know what is important for them at a given stage in the course of their life.
An individual has their own priorities that are generally derived from the responsibilities he/she has toward his/her family. In addition, an individual may also have unconventional priorities such as traveling to Europe, launching own music album and the likes. We believe be it conventional priorities or unconventional aspiration, no dream should remain neglected due to lack of financial planning or due to wrong financial decisions. Thus, it is advisable to have priorities and a fund to meet these priorities.

Let us look at how planning helps in executing some of the goals in life:

a) A trip to an exotic location abroad:

Every individual likes to travel and explore different places on earth. To execute this goal, you can always create a fund that is aimed at generating monthly gains. For example, let us assume you wish to travel to Europe or any other location for one week, 2-3 years down the line. Given the period of investment is less than five years; it makes more sense to invest in debt funds with high credit rating instruments. Debt funds are expected to generate higher returns than fixed deposits. Let us assume that the total cost of the trip is Rs 1,75,000. Saving Rs 7,000 monthly for two years with annualized returns of 8% can fetch you Rs 1.82 lakhs in total at the end of two years (assuming no withdrawal in between). With the term of over one year, an investor can also avail indexation benefits on first year’s investments. An investor can also withdraw money for planning for his/her trip as shown below:

Withdrawal Amount Reason
3 months before the tentative travel date 15000 Visa and travel insurance
2 months before the travel date 60000 Round trip flight tickets
1 month before travel 50000 Hotel booking
During travel 50000 To be used for sightseeing and intra-city expenses etc.

b) Pre-paying your home loan/buying home:

Most of the individual relies on home loans for purchasing a property. Should you wish to pre-pay the home loan to save on your liability, you would need a large sum of money. It is advisable to put savings into a separate fund say “Home Loan Repayment Fund”. Given the typical home loan horizon is 20 years, an individual may wish to repay in 7 years to max 10 years. Thus, with a long-term horizon, investment can be made in equity mutual funds. For example, an equity fund with small/mid-cap bias is suitable for a long-term horizon as these funds are expected to outperform over a business cycle. Some of the suitable funds are – Reliance Small Cap Fund, Franklin India Smaller Companies Fund, etc.

Similarly, if you are planning to purchase a house, you may choose to invest in equity funds or balanced funds to save for the down payment. Typically down payment is hefty (generally greater than Rs 15 lakhs for metropolitan) and thus regular savings habit in mutual funds help you plan well.

c) Emergency Fund:

These funds are required to meet any exigency such as job loss. It is advisable to have three months’ expense saved in a liquid fund. This will help you safeguard your loved ones. Liquid funds because they are typically risk-free and invest in ultra short-term debt funds that have securities with high credit rating.

d) Major Expenses

Apart from buying a property, there are many other expenses such as Children’s education, Children’s marriage, Self-marriage, etc. that involve heft expense. These expenses also have a different time horizon. For example, while your marriage expense may be incurred in five years time, the children’s education and marriage expenses may be incurred in 15 years time and 25 years time respectively. Thus, taking into account the horizon and requirement of the fund, the mutual funds may differ. Check out Oro’s calculator to check how much you need to save for different goals.

We believe a separate fund for all your life goals is easy to build provided you start right. Having discussed the need for separate funds for each goal let us provide you with a quick snapshot of some of the common goals and funds one can look at for achieving these goals. Following are the goals that are offered in Oro’s platform. These goals are well thought of depending on the requirement of a common investor.

Let us show how to plan for each of the goals:

  Horizon Target Amount Type of funds to look for
Own Marriage 5-7 years Rs 5 Lakhs Balanced Fund

Large Cap Equity Fund

Prepaying home loan/housing plan 7-10 years Rs 25 Lakhs Equity Fund

(Multi-cap – SMID cap bias)

Children education 15-20 years Rs 20 Lakhs Equity Fund

(Multi-cap – small-cap bias)

Pilgrimage for parents 2-3 years Rs 2.5 Lakhs Debt Fund
Euro Trip / Holiday Plan 2-3 years Rs 5 Lakhs Debt Fund
Children marriage 18-20 years Rs 15 Lakhs Equity Fund

(Multi-cap – small-cap bias)

Safety net 1 year Equivalent to three month expense Debt – Liquid Funds
Retirement planning 30-35 years Rs 5 crore Equity fund
(Small-cap bias)
Major Expense 5-7 years Rs 50 lakhs Equity fund
(Small/mid-cap bias)
General Investing 1-3 years / Ongoing Rs 15 lakhs Balanced Funds

Source: ORO Wealth; Note: All figures in INR 

Note: Multi-cap here means funds that invest in companies across market capitalization;

Please, note this only for information purpose and the actual fund may change depending on the risk profile of the individual that would include age, monthly cash inflow, liabilities etc.

SMID is small and mid-cap combined

We believe outsized returns are earned over time by investing in sound businesses at a substantial discount to their intrinsic value. For long-term investing, it makes more sense to have high exposure to the small and mid-cap segment as these segments of the market are extremely fertile for generating returns as a result of greater inefficiencies and greater information asymmetries that exist there. Thus, we recommend investing in SMID-cap funds for long-term investing.

Lastly, while we are sure that by now you would be excited enough to start your goal-based funds, let us also share with you one of the most important financial planning decision an individual should make. We believe it is a good idea to save a part of our cash inflow towards building a corpus. This corpus is likely to insulate you from any unforeseen events that might occur in your life in future. For example, becoming a millionaire for a young individual is no more a distant dream and every individual should aim at building a corpus with an aim of becoming a millionaire before attaining the age of 30 years. Saving Rs 5000 per month and investing in debt funds and equity funds with an annual increment of 10% can enable you to save Rs 10 lakhs in eight years.

To conclude and recap, we would like to re-iterate that investing money for every personal and financial goal separately is a good idea and promotes disciplined financial planning. At Orowealth, we believe in providing you with the best solution so that you attain your goal easily and in the fastest manner possible. Should you wish to start your goal saving plan, feel free to get in touch with us and we shall be glad to assist you.

Nitin Agrawal
Nitin Agrawal
nitin@orowealth.com

Nitin is the Co-founder and CEO at Orowealth and has worked at Deutsche Bank for 6 years in Equity Structuring across their London and Singapore offices. He is a MBA from IIM Bangalore and has a degree in Electrical Engineering from IIT Bombay.

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