Suppose you have a current annual expense of ₹16 lakh. You would need approximately ₹1.43 crore every year to meet your expenses when you retire 32 years from now! You’d need a retirement corpus of ₹15 crores to be financially free.
We also saw investment portfolios that you can invest in to achieve this retirement corpus. But we didn’t discuss where exactly you need to invest to achieve those returns, or rather, where exactly to invest for financial freedom!
Time Horizon-Based Portfolio Selection
You can select portfolios with different returns based on the investment time horizon of your goal. Following are the different investment time horizons:
1. Short-term Goals
- These are goals that are to be achieved in the next 1-3 years.
- High exposure is to be given to safe asset classes as the goal is relatively closer.
- A return of 8% CAGR can be targeted for these goals.
2. Medium-term Goals
- These are the goals that are to be achieved in the next 4-7 years.
- More exposure is to be given to safe asset classes, while a small exposure can be given to the return-generating asset class, i.e., equity.
- A return of 10% CAGR can be targeted for these goals.
3. Long-term Goals
- These are goals that are to be achieved in the next 8 years or later.
- You should give high exposure to equity as the goal is relatively far away.
- A reasonable exposure should also be given to safe asset classes to ensure the stability of the portfolio.
- Returns of 16-20%+ CAGR can be targeted for these goals.
- We have three different portfolios with conservative, moderately aggressive, and aggressive approaches giving 12%, 15%, and 18% CAGR, respectively.
Asset Allocation
We allocate our investments into different asset classes for returns and safety. We will be allocating our investments to three different assets:
1. Equity
- Equity refers to the shares of companies.
- Returns from equity investments are very high, and so is the risk.
- You can expect returns of 12-20% CAGR depending on the stock.
You can invest in equity in two ways:
- Direct Stock Investments – buying stocks like Reliance and Tata Motors via a broker (like Zerodha, Groww, and Fyers).
- Equity Mutual Funds. Learn about mutual funds here.
2. Debt
- Debt refers to the investment made in bonds.
- When a company needs capital, it can borrow money from the public in consideration of an interest payment. These payments are fixed.
- Returns in debt are moderate but the risk is low.
- You can expect returns of approximately 6-8% CAGR from debt investments.
- You can invest in debt via debt mutual funds.
3. Gold
- Gold has given a very good historical performance.
- You can expect returns of 5-6% CAGR by investing in gold.
- You can invest in gold via Gold BeES or Sovereign Gold Bonds (SGBs). To learn about Gold BeES and SGBs, click here.
How Much to Invest in Each Asset:
You can click here to access marketfeed’s calculator.
It’s a READ-ONLY VERSION. You have to make a copy of the document to edit it.
Instructions to Use the Calculator
1. The link will take you to the read-only version of our “Where to Invest” Excel Calculator. Click on ‘Make a Copy’ under the File tab to create a copy of the calculator. You could also download the file as .xslx to use the calculator on Microsoft Excel.
2. Edit or enter figures in the yellow cells only. Do not edit any cells other than those in yellow as it will interfere with the preset formulas.
3. The calculator has 8 sheets:
- 8% Short-Term Goal – To calculate asset allocation for short-term goals with a targeted return of 8% CAGR.
- 10% Medium-Term Goal – To calculate asset allocation for medium-term goals with a targeted return of 10% CAGR.
- 12% Conservative Long-Term Goal (No ELSS) – To calculate asset allocation for long-term goals through a conservative approach with a targeted return of 12% CAGR with no allocation to the ELSS category. To learn about Equity Linked Savings Scheme (ELSS), click here.
- 12% Conservative Long-Term Goal (ELSS) – To calculate asset allocation for long-term goals through a conservative approach with a targeted return of 12% CAGR with allocations to the ELSS category.
- 15% Moderately Aggressive Long-Term Goal – To calculate asset allocation for long-term goals through a moderately aggressive approach with a targeted return of 15% CAGR with allocations to the ELSS category.
- 16-20% + Aggressive Long-Term Goal – To calculate asset allocation for long-term goals through an aggressive approach with a targeted return of 16-20%+ CAGR with allocations to the ELSS category.
8% Short-Term Goal
Here are the steps to find your allocations:
1. Enter the Goal Name.
2. Input how far away your goal is (in years).
3. Input the SIP amount.
The SIP amount adjacent to the 8% portfolio presented by the goal planning calculator should be entered here.
4. Start your SIP!
The calculator will display to you the recommended fund to invest in, along with its respective category and asset class. Additionally, it will also show you the amount to be invested via SIP in different funds. It also shows the allocation-based return and a pie chart representing the allocation weightage.
Also read: What is a Systematic Investment Plan (SIP)?
10% Medium-Term Goal
Here are the steps to find your allocations:
1. Enter the Goal Name.
2. Input how far away your goal is (in years).
3. Input the SIP amount.
The SIP amount adjacent to the 10% portfolio presented by the goal planning calculator should be typed here.
4. Start your SIP!
The calculator will show which fund to invest in, what category and asset class it belongs to, and the SIP amount to be invested in different funds. It also shows the allocation-based return and a pie chart representing the allocation weightage.
12% Conservative Long-Term Goal (No ELSS)
Here are the steps to find your allocations:
1. Enter Goal Name
2. Input how far away your goal is (in years).
3. Input the SIP amount
The SIP amount adjacent to the 12% portfolio presented by the goal planning calculator should be entered here.
4. Start your SIP!
The calculator will mention which fund to invest in, what category and asset class it belongs to, and the SIP amount to be invested in different funds. It also shows the allocation-based return and a pie chart representing the allocation weightage.
12% Conservative Long-Term Goal (ELSS)
Here are the steps to find your allocations:
1. Enter Goal Name
2. Input how far away your goal is (in years).
3. Input the SIP amount
The SIP amount adjacent to the 12% portfolio presented by the goal planning calculator should be entered here.
4. Start your SIP!
The calculator will display to you the recommended fund to invest in, along with its respective category and asset class. Additionally, it will also show you the amount to be invested via SIP in different funds. The investment strategy allocates the initial ₹1.5 lakhs of yearly investment to ELSS funds. It also shows the allocation-based return and a pie chart representing the allocation weightage.
15% Moderately Aggressive Long-Term Goal (ELSS)
Here are the steps to find your allocations;
1. Enter Goal Name
2. Input how far away your goal is (in years).
3. Input the SIP amount
The SIP amount adjacent to the 15% portfolio presented by the goal planning calculator should be typed in here.
4. Start your SIP!
The calculator will display to you the recommended fund to invest in, along with its respective category and asset class. Additionally, it will also show you the amount to be invested via SIP in different funds. The investment strategy allocates the initial ₹1.5 lakhs of yearly investment to ELSS funds. It also shows the allocation-based return and a pie chart representing the allocation weightage.
16-20% + Aggressive Long-Term Goal
Here are the steps to find your allocations;
1. Enter Goal Name
2. Input how far away your goal is (in years).
3. Input the SIP amount
The SIP amount adjacent to the 16% portfolio presented by the goal planning calculator should be entered here.
4. Start your SIP!
The calculator will show which fund to invest in, what category and asset class it belongs to, and the SIP amount to be invested in different funds. The investment strategy allocates the initial ₹1.5 lakhs of yearly investment to ELSS funds and allocates a part of the investment to a direct stock portfolio, which will be learned to build in the coming modules. It also shows the allocation-based return and a pie chart representing the allocation weightage.
In conclusion, there is no one-size-fits-all answer to the question of where and how much to invest to achieve financial freedom. The calculators in the previous and current chapters will help you find answers to these questions. In the next module, we will learn how to read and analyze the annual report and financial statements of a company, perform ratio analysis, and build a well-diversified stock portfolio on our own.
