New Delhi: Navin, 30, an IT professional has a dream to retire by the age of 45 and pursue his own startup dream. He started working at the age of 23 and has been investing in equity mutual funds since then regularly. As of now, he has Rs 15 lakh in three different equity mutual fund schemes. Recently, he has bought a house for which he has availed a home loan of Rs 40 lakhs at 7.15% interest. At present, Navin’s monthly take-home salary is Rs 1.35 lakh. He wants to accumulate a retirement corpus of Rs 5 crore and also wants to pay off his home loan by that age. Is it possible?
As Navin wants to clear his home loan by the age of 45, he has 15 years to repay the loan. So he has to pay Rs 36,289 EMI to clear the home loan in the next 15 years. Assuming that his monthly expenses are 30% (around Rs 40,000) of his take-home salary, he will be left with a surplus of Rs 58,711 every month. If we assume that out of this surplus amount he invests Rs 55,000 every month in five different mutual funds through SIP (Rs 11,000 each) then he can accumulate Rs 2.75 crore at an expected return of 12% per annum. If we reduce our return expectation to 10% then the SIP will grow to Rs 2.28 crore by the age 45.
Also, his current mutual fund investments, which is Rs 15 lakh at present, are expected to grow to nearly Rs 90 lakh at an expected CAGR of 12% and to Rs 66.80 lakh at an expected CAGR of 10%. So the total amount that Navin can accumulate by the age of 45 is Rs 3.65 crore (at 12% expected return) and Rs 2.95 crore (at 10% expected return). As we can see in none of the above cases he can accumulate Rs 5 crore by the age 45.
But under two scenarios, Navin can achieve his target of accumulating Rs 5 crore corpus. First, if we increase the return expectation to 15% then he will be able to accumulate Rs 5 crore (his SIP will grow to Rs 3.72 crore and his present MF investments will grow to Rs 1.40 crore). Secondly, if he increases his SIP amount by 10% every year then Navin can achieve his goal.
Although the first option looks quite unlikely the second option is possible. If Navin is not able to increase his SIP amount by 10% every year then he has to push back his retirement age to 48, by which he can accumulate Rs 5 crore corpus.