Summary of this article
Reaching Rs 50 lakh in 7 years needs high, disciplined investing.
You can choose hybrid or equity mutual funds based on your risk level.
Step-Up SIPs let you start lower and still hit the target.
Aggressive targets would require an aggressive investment journey. Accumulating Rs 50 lakh in five or seven years would require substantial investments and would be possible only if you have a good plan and a disciplined investment approach. How early you can build a massive corpus in mutual funds will depend on three factors: how much returns your investments offer, the amount you invest and how disciplined you are as an investor. Out of these three factors, returns on investments are not a factor that you can control. But you can work on the other two factors -- investment amount and disciplined approach.
Where to invest to create a corpus of Rs 50 lakh? Well, the answer to this question lies mainly in two factors: your risk appetite and how long you wish to invest to build a massive corpus.
Suppose you want to achieve the target amount in five years; in this case, pure equity funds may not be suitable for you. You may then look at hybrid funds. Or, if you want to achieve this corpus in seven to 10 years, you may invest in diversified equity funds.
Now, hybrid funds are the funds that have to mandatorily invest in both equity and debt instruments. They tend to carry lower risk as compared to pure equity funds due to the presence of debt instruments.
There are seven different types of hybrid funds, defined by the market regulator, the Securities and Exchange Board of India (Sebi).
Aggressive hybrid funds, for instance, are hybrid funds that have to invest a higher amount, between 65 per cent and 80 per cent, in equities and the remaining in debt. Another category, conservative hybrid funds, can invest anywhere between 10 per cent and 25 per cent in equities and the remaining in debt instruments.
Balanced hybrid funds, as the name specifies, have to invest between 40 per cent and 60 per cent in equities and the remaining in debt. There is another category which is popular among investors currently, amid its superior returns-- the Multi-Asset Allocation Funds. They have to invest in at least three asset classes with a minimum allocation of 10 per cent in each asset class. Most of such funds are invested in equities, debt, commodities like gold and silver and real estate.
Coming to equity funds, there are large-cap funds, mid-cap, small-cap, large & mid-cap, flexi-cap, and multi-cap funds. Pure equity funds are expected to carry higher risk as compared to hybrid funds.
Now, without getting into technical details, as the name specifies, mid and small cap funds are more volatile in nature as compared to their large cap peers, whereas flexi cap funds give some level of flexibility to the fund manager to invest across market cap companies as per the fund manager’s decision.
What kind of returns have hybrid funds and equity funds generated?
Multi-Asset Allocation Funds, one of the most popular hybrid funds currently, have delivered 16.35 per cent returns in the last five years. Aggressive Hybrid funds on average have delivered returns of 15.85 per cent, Balanced Hybrid Funds-- 10.80 per cent and conservative hybrid funds have given 8.50 per cent returns during the same time period.
Coming to equity funds. Large-cap funds have given an average of 14.34 per cent in the last seven years. Mid-cap funds have given 19.41 per cent, small caps have given 20.12 per cent returns, and flexi-cap funds have generated 15.62 per cent returns in the last seven years.
While higher returns look tempting, you should not look at just returns before investing. Select a mutual fund that goes well with your risk profile. You can take the help of an advisor if you are not sure about which mutual fund is suitable for you.
How much to invest to build a Rs 50 lakh corpus?
The higher the sum you invest, the sooner you can reach your target corpus of Rs 50 lakh. For calculation purposes, we have assumed that the investor has no existing investments and is starting afresh. Look at the table below:
According to the math, assuming your investments earn you 12 per cent returns, you would have to invest Rs 39,000 per month to reach your target corpus of Rs 50 lakh. If your returns go up to 15 per cent, you could reach the same target by investing a lower sum of Rs 35,000 per month.
Similarly, you can check the amount you would need to invest if you want to achieve the Rs 50 lakh corpus in five years or 10 years.
Now, if an investor is not comfortable investing such higher amounts of money, he can use a technique of investing called Step UP SIP.
What is Step-Up SIP? A Step-Up SIP (also known as a Top-Up SIP) is a feature that lets you automatically increase your SIP contributions at regular intervals—typically every year. Instead of sticking to a fixed amount each month, your SIP contribution gradually increases by a pre-set percentage or amount over time. For example, if you start with an SIP of Rs 5,000 and set a step-up of Rs 500 annually, your SIP will increase to Rs 5,500 in the second year, Rs 6,000 in the third year, and so on.
Many mutual fund houses, including big names like SBI Mutual Fund, HDFC Mutual Fund, Mirae Asset AMC, Kotak Mutual Fund and others, offer this option. It is also called Top-Up SIP.
So, suppose you decide to opt for a five per cent step up every year, at 12 per cent returns, you could start with investing Rs 34,200 every month during the first year and then increase your investment amount by 5 per cent every year, to build a Rs 50 lakh corpus in seven years.
If you choose to increase your mutual fund SIP investments by 10 per cent every year, you could begin with an even lower investment amount of Rs 30,000 per month to reach the target corpus in seven years. Similarly, if your investments earn a higher rate of return of 15 per cent per year, you would need to invest a lower sum every month to reach the same target.
And, don’t worry if you cannot invest this much. You can begin your investment journey with any amount you are comfortable with. And then continue to increase your investments every year or sooner as you can. And, as you kickstart your investment journey, build up and define your financial goals and start working towards them.
