I’m 32, paying a home loan EMI of Rs 85,000. What is the best way to invest Rs 1 lakh a month to meet my goals?

Hi, I am a 32-year-old software engineer. I currently have a home loan of Rs 83 lakh, for which I am paying Rs 85,000 as equated monthly income (EMI). Other than PF, I don’t have any other investments. After all my expenses, including the two kids’ current education needs, I aim to invest Rs 1 lakh every month. What is the best way to start? I do not have any SIP as of now. 

Name withheld 

Reply by Adhil Shetty, CEO, BankBazaar.com 

As a 32-year-old software engineer with a home loan of Rs 83 lakh, the prospect of investing can seem daunting. It feels like you are already indebted and want to ensure your extra income is put to wise use without further risk. The steps below should be considered as a guide for successfully starting an investment journey with Rs 1 lakh per month. 

An investment strategy should be chalked out based on your financial goals, risk appetite and time horizon. Mutual funds can be a great starting point. However, instead of investing the lump sum amount, consider a systematic investment plan (SIP) that encourages disciplined investment, mitigates risk of market volatility and benefits from the power of compound interest. 

As mentioned, SIPs are a great way to invest for the long term and systematically break down difficult goals. PF is an excellent debt investment along with tax benefits. With the SIPs, you should start by identifying and establishing investment goals. For example, you may want to save Rs 10 crore for retirement by the age of 60 or Rs 2 crore for your children’s higher education by 45. With the time left, work backwards to calculate what you need to invest every month with an assumed rate of annual return (such as 12% for equity or 6% for debt). 

Use an SIP calculator. Split your monthly savings into monthly SIPs as required for the goal. With a near-term goal (under three years), you can take a conservative route with low-risk investments such as debt funds. Investing in debt funds can be a safer alternative. For a distant goal such as retirement, you can invest aggressively with equity. Investing in equity funds or direct equity has the potential to offer significant returns. However, these come with high risk. 

Additionally, ensure you have emergency savings. This fund acts as a financial safety net and should ideally consist of three to six months of living expenses. Park your emergency fund in a liquid investment like a savings account or money market fund for easy and quick accessibility. 

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You must also take adequate health and term insurance and a plan to pay off your home loan. These insurance policies protect you and your family against unforeseen health issues or untimely demise. An adequate amount of sum assured should be chosen to cover all liabilities and provide financial security to your dependents. 

The home loan interest rates in India typically range between 7% to 10%. If you manage to save some interest costs by prepaying the loan, it will be a great saving. However, you should also check for any prepayment penalties. 

Having the right interest rate as per your income and credit profile will lead to lower EMIs and higher interest savings, which can be diverted towards investment goals. 

Remember, investing is not a one-time act but a process. Ensure to review and rebalance your investment portfolio periodically. Building solid financial health takes time, patience, and careful planning. Always seek advice from financial advisors if you have doubts, and stay dedicated to your financial goals. 

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)