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Building Your Crorepati Dream

25 Apr 2024 - Tushar
Reading time about 11 minutes

Congratulations! You’ve set your sights on a life-changing goal: building a ₹ 1 crore portfolio. Now lets see how you can navigate this journey using the power of mutual funds, while taking in to your risk appetite into consideration.

Building Your Crorepati Dream

Understanding Your Risk Profile

Investing can be an exciting journey towards achieving your financial goals. But before diving headfirst into the market, understanding your risk profile is crucial. It’s like choosing the right car for a road trip - you wouldn’t pick a sports car for a bumpy off-road adventure, and vice versa!

What is Risk Profile?

Your risk profile essentially reflects your comfort level with investment risk. It considers two key factors:

  • Risk Tolerance: How much volatility (ups and downs) can you handle in your portfolio? Are you okay with short-term fluctuations, or do you prefer a smoother ride?
  • Investment Horizon: How long do you plan to stay invested? Short-term goals require a different approach compared to long-term ones.

Risk Profiles Explained

1. Conservative Investor:

  • Risk Tolerance: Low. Prefers stability over high returns.
  • Investment Horizon: Short to medium term (less than 7 years).

2. Moderate Investor:

  • Risk Tolerance: Moderate. Can handle some market volatility but seeks a balance between risk and reward.
  • Investment Horizon: Medium to long term (7-15 years).

3. Aggressive Investor:

  • Risk Tolerance: High. Comfortable with significant market fluctuations in pursuit of potentially higher returns.
  • Investment Horizon: Long term (15+ years).

How to Assess Your Risk Profile

Here are some pointers to help you understand your risk profile:

  • Think about your financial goals: Are you saving for retirement, a child’s education, or a down payment on a house? Each goal has a different risk tolerance.
  • Consider your age: Generally, younger investors have a longer time horizon and can handle more risk.
  • Evaluate your financial situation: Do you have a stable income and emergency savings? A financial safety net allows for a more aggressive investment approach.

Remember: Your risk profile is not set in stone. It can evolve over time as your life circumstances and goals change. Regularly review your risk profile and adjust your investment strategy accordingly.

Benefits of Understanding Your Risk Profile

  • Makes informed investment decisions: Choosing investments aligned with your risk tolerance helps you avoid sleepless nights and unnecessary stress.
  • Sets realistic expectations: Knowing your risk tolerance helps you set realistic goals for your portfolio’s performance.
  • Builds a well-diversified portfolio: By understanding your risk profile, you can allocate your investments across asset classes (equity, debt, gold) to create a balanced portfolio.

Step-by-Step Guide to Your Crorepati Portfolio

Step 1: Goal Setting & Timeline

  • Define your goal clearly: Is it retirement planning, a child’s education, or a dream vacation?
  • Set a realistic timeline: Reaching ₹ 1 crore depends on your investment horizon. The longer you invest, the lower the monthly SIP amount required.

Here’s a data point to consider: Let’s assume an expected return of 12% CAGR (Compounded Annual Growth Rate). This is a reasonable historical average for equity funds in India, but not a guaranteed future performance.

Time Horizon Monthly SIP (approx.) to reach ₹ 1 crore Total Investment
7 Years ₹ 77,638.94 65.21 Lakh
10 Years ₹ 44,635.71 53.56 Lakh
15 Years ₹ 21,011.43 37.82 Lakh
20 Years ₹ 10,871 26.09 Lakh

Reality Check with historic performance of Mutual Funds

For simplicity, we’re considering only the regular Flexi-cap category of mutual funds in this example. We will take 5 schemes with mix of best and worst performing schemes.

1. SIP of ₹10,000 for 20 years

Now, let’s see how a SIP of ₹10,000 performs in mutual funds over time. Take a look at the table below. As you can see, these funds have the potential to generate returns exceeding 12% over 20 years.

This means your ₹10,000 SIP in some of these schemes over the past 20 years could have grown to over ₹1 crore. However, it’s important to note that some schemes might underperform.

Over this 20-year period, your total investment would be ₹24 lakhs (12 months/year * 20 years * ₹10,000/month).

Scheme name AMC Name Current Value Return (%)
HDFC Flexi Cap HDFC MF 1,69,15,800 17.05
Franklin India Flexi Cap FranklinMF 1,60,83,721 16.64
ABSL Flexi Cap ABSLMF 1,40,84,350 15.57
Canara Robeco Flexi Cap CanaraMF 1,34,89,690 15.22
HSBC Flexi Cap HSBCMF 1,18,38,233 14.15
Taurus Flexi Cap TaurusMF 94,82,263 12.32
LICMF Flexi Cap LICMF 75,33,355 10.4

2. SIP of ₹20,000 for 15 years

As we can see in below table SIP of ₹20,000 in some of the schemes was able to generate excess returns while some were lagging.

Over this 15-year period, your total investment would be ₹36 lakhs (12 months/year * 15 years * ₹20,000/month).

Scheme name AMC Name Current Value Return (%)
Quant Flexi Cap QuantMF 1,82,37,659 19.63
JM Flexi Cap JMMF 1,53,39,366 17.65
Bandhan Flexi Cap BandhanMF 1,17,57,343 14.58
UTI Flexi Cap UTIMF 1,08,18,502 13.61
LICMF Flexi Cap LICMF 86,28,054 10.94

3. SIP of ₹45,000 for 10 years

As we can see in below table SIP of ₹45,000 in all of the schemes were able to generate excess or reach goal of ₹ 1 crore.

Over this 10-year period, your total investment would be ₹54 lakhs (12 months/year * 10 years * ₹45,000/month).

Scheme name AMC Name Current Value Return (%)
Quant Flexi Cap QuantMF 1,95,45,604 24.6
JM Flexi Cap JMMF 1,57,34,169 20.54
Parag Parikh Flexi Cap PPFASMF 1,52,60,317 19.98
SBI Flexi Cap SBIMF 1,15,94,177 14.82
UTI Flexi Cap UTIMF 1,04,75,837 12.89

4. SIP of ₹75,000 for 7 years

As we can see in below table SIP of ₹75,000 in all of the schemes were able to generate excess or reach goal of ₹ 1 crore.

Over this 7-year period, your total investment would be ₹63 lakhs (12 months/year * 7 years * ₹75,000/month).

Scheme name AMC Name Current Value Return (%)
Quant Flexi Cap QuantMF 1,20,25,524 29.6
Parag Parikh Flexi Cap PPFASMF 1,40,81,172 22.58
Union Flexi Cap UnionMF 1,23,15,981 18.81
ABSL Flexi Cap ABSLMF 1,15,51,141 17.01
LICMF Flexi Cap LICMF 1,05,01,818 14.34

As the above data shows, you can build ₹ 1 Crore portfolio by doing SIP in mutual funds. As your investment period increases your investment requirement decreases. You can see that to build ₹1 crore portfolio you need do SIP of ₹ 10,000 if your time horizone is 20 years while you will need do SIP of ₹75,000 if your time period is reduced to 7 years. Also shorter time period needs more capital as well.

Step 2: Choosing Funds based on Risk and Time

While most equity funds discussed earlier can help build your ₹ 1 crore dream portfolio, their annual returns may fluctuate. This volatility creates risk and can cause investor anxiety.

Therefore, it’s crucial to assess your risk tolerance and consider your investment timeframe when managing your portfolio’s risk. One effective way to achieve this is by diversification, which involves investing in different asset classes. These include debt, commodities (like gold and silver), and equity.

Mutual funds offer a wide range of options beyond just equity funds. You can also invest in debt funds, gold funds, and silver funds within a single mutual fund platform. Additionally, within the equity portion of your portfolio, consider diversifying further across different fund categories. These categories include large-cap funds, mid-cap funds, multi-cap funds, small-cap funds, etc. each offering varying risk-return profiles.

By allocating the right mix of equity and debt, you can create a portfolio aligned with your risk tolerance. A common starting point is a 60:40 ratio (equity:debt) for moderate investors. Aggressive investors can tilt their portfolio towards more equity and less debt, while conservative investors may prefer a higher debt allocation with less equity.

Step 3. Start Your SIP & Stay Invested

  • Power of Rupee-Cost Averaging (RCA): SIPs are your secret weapon. By investing a fixed amount regularly, you purchase more units when the market dips (potentially lower cost) and fewer units when it’s high (potentially higher cost). This averages out your investment cost over time, reducing the impact of market volatility.

  • Stay Disciplined: Market fluctuations are inevitable. Don’t panic and redeem your investments during downturns. Stay invested for the long term to benefit from compounding.

Step 4: Build Emergency Fund

Life is full of surprises, some wonderful, some unexpected. An emergency fund acts as a financial safety net to catch you during challenging times, like job loss, medical emergencies, or sudden car repairs. Building an emergency fund is crucial before focusing on other investments for long-term goals.

A common recommendation is to save 3-6 months of your living expenses in your emergency fund. This amount can vary depending on your individual circumstances.

With a solid emergency fund in place, you can invest for your long-term goals (retirement, child’s education) with more confidence, knowing you’re prepared for unforeseen circumstances.

Step 5: Review & Rebalance (Periodically)

  • Market Conditions: Review your portfolio performance at least annually.
  • Asset Allocation Drift: Over time, the value of your equity and debt holdings will fluctuate, affecting your asset allocation ratio. Rebalance your portfolio periodically to maintain your desired risk profile.

Additional Tips for Success

  • Increase Your SIP: As your income grows, consider increasing your SIP amount to accelerate wealth creation.
  • Tax Planning: Explore tax-saving mutual funds (ELSS) to benefit from tax deductions under Section 80C of the Income Tax Act.
  • Professional Guidance: A financial advisor can personalize your investment plan based on your unique goals, risk tolerance, and financial situation.

Remember: Building a ₹ 1 crore portfolio requires discipline, patience, and a strategic approach. By following these steps and staying invested for the long term, you can turn your dream into a reality.

Disclaimer: This is general information, and you should consult a financial advisor for personalized investment advice. Past performance is not necessarily indicative of future results.

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