Equity mutual funds beat fixed income asset class over long term

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NEW DELHI : I am 40 years old and I have a net monthly salary of 1 lakh. I want to invest in mutual funds to accumulate 60 lakh in 15 years for my child’s higher education and 1 crore in 20 years for creating my retirement corpus. I have already been investing in PPF for the last five years apart from my monthly contribution to EPF to save tax under section 80C as well as to create my retirement corpus. Please suggest mutual fund schemes and required monthly investment to achieve those goals.

-Name withheld on request

Given that you have investment horizons of 15 years and 20 years for creating your child’s higher education and retirement corpus, I will suggest you to invest in equity mutual funds as the asset class of equities beats fixed income asset class by a wide margin over the long term. Assuming an annualized return of 10%, you will need to invest about 15,000 per month to build a corpus of 60 lakh in 15 years. For building your retirement corpus in 20 years, you will need to invest about 13,000 per month assuming the same rate of returns.

You can consider the direct plans of these large cap index funds and flexicap/‘large & mid-cap’ funds—Parag Parikh Flexi Cap Fund or Mirae Asset Emerging Bluechip Fund; and Tata Index Sensex Fund or HDFC Index Sensex Fund—for building your corpuses through SIPs.

You can continue investing in PPF for building a part of your retirement corpus. As PPF is backed by sovereign guarantee and also offers tax free returns, investing in both PPF and equity mutual funds will offer you asset class diversification for retirement security.

However, if you have a higher risk appetite, then consider investing in ELSS funds instead of PPF to bolster your retirement security and receive income tax deduction under section 80C. ELSS funds have lock-in periods of just three years, the shortest among all investment instruments qualifying for the section 80C deduction. Moreover, being invested in equities, ELSS funds offer higher upside potential than PPF over the long term. You can consider investing in the direct plans of any of these ELSS funds—Mirae Asset Tax Saver and/or Axis Long Term Equity Fund—through SIPs.

Naveen Kukreja is the chief executive officer and co-founder of Paisabazaar.com. Queries and views at mintmoney@livemint.com.

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