Hemant Rustagi, CEO of Wiseinvest Advisors, in an interview on CNBC-TV18 discussed personal finance questions. He also talks about long term mutual funds which look good to invest in over a period of 16-20 years.
Below is a verbatim transcript of his interview with CNBC-TV18’s Latha Venkatesh and Anuj Singhal. For the complete interview watch the accompanying videos.
Q: In which mutual fund should an investor invest Rs 10,000 per month for 15 years?
A: It definitely helps to know what the target is and what the time horizon is. To all those who want to achieve a target for a longer period of time, there are certain basic rules you must follow to make your target achievable. First thing is never get intimidated by the target. Many a times we have a large target in mind and we don’t even start investing thinking it is such a large target, I don’t have money to invest, let me not even begin.
Don’t do that, because any target is achievable. What is required is to follow discipline. Invest in asset classes that can beat inflation, because when you are investing for 15-20 years, your biggest threat is inflation, not so much capital loss. That is where equity comes into play.
But as we know, equities can be volatile during the short-term and medium-term. That is where a systematic approach definitely helps because you get benefit of averaging. Third is start early, because the longer time you give your money, the more you benefit from power of compounding. Fourth is go for investor options which are tax sufficient, which is what exactly equity does for you.
With all these four ingredients there, any target is achievable. If an investor can afford to invest around Rs 8,500, he can achieve the target. He earns a return off 15% which considering a time horizon of 15 years is definitely achievable. If he does that, he can consider a couple of funds. He can look at funds like HDFC Equity, Fidelity Growth, and ICICI Bluechip which is a largecap fund. A mix of these three funds, carry on the process of 15 years, he can achieve his target of Rs 60 lakh.
Q: Should he invest in various kinds of equities or should he try any other asset class at all?
A: The point is when you are investing for 16 years your biggest threat is beating inflation. The moment you bring in debt portfolio, that part of your portfolio will not be able to beat inflation. The point is, when you are investing for 16 years or 20 years, capital loss is not too much of a risk. It is only the inflation which is a bigger risk. Focus on diversified fund, focus on equity as an asset class, you can achieve the target.
Q: Which mutual fund should I invest in for a return of Rs 1 crore in 25 years? A: If the investor knows that the target is Rs 1 crore and the time horizon is 25 years, the longer he gives his money time to grow, the better it is. That way it is basically going to work in his favor here. He clearly needs to look at equity as an asset class because that is where he can actually make this kind of return.
Because he is giving that much time for his money to grow, he just needs to invest Rs 4,000 per month and I am assuming an annualized return of 15% which I feel is achievable, especially with a time horizon of 25 years. So if he invests Rs 4,000 per month, through SIPs in say two funds, I can suggest HDFC Top 200, which is essentially a largecap fund that has some exposure to midcap, and the second one is IDFC Premier Equity.
If he invests Rs 2,000 in each of these funds and continues the process for 25 years, he can achieve his target. The important thing is to give as much time as possible for your money to grow. In case he has a time horizon of 20 years, he would have to invest Rs 8,000 to achieve the same target. An additional five years makes that much difference.
Q: Many small investors get stars in their eyes when you place that big figure of Rs 1 crore or whatever when you are told that if interest rate is 10%, then at the end of seven years, you will double your money. The very thought that my Rs 500 is going to be Rs 10,000 or Rs 50,000, that gives you a sense of elation. Can you give investors some idea of how much inflation will eat up? A: He should be clear about whether he is looking at debt or at equity. When you are investing for such a long time horizon, even if you take an average of say 6% inflation, and if you are investing in traditional instruments, where the return is around say 7% or 8%, the important thing is to look at post tax and return.
This is because for equity as an asset class, you don’t have to pay tax in the long-term capital gain. For other debt oriented asset classes you have to pay tax and then you have to look at inflation. Your real rate of return has to be in your favor which means that return minus inflation has to be in your favor. Unless and until you have investment philosophy that takes care of that, you cannot build capital.
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