I am 30 years old. I want to go on a trip to Europe by the time I turn 35. Please suggest some suitable investment plans.
Visiting Europe is one of the most popular things to do in everybody's bucket list. The artistic scenery, cultural heritage and the dazzling diversity, who wouldn't like to go on a European holiday? However, going on an international holiday – from booking your flight tickets, accommodation to having exotic foods – can be quite an expensive affair. If not planned properly, you would only be racking up huge debts, undermining your riveting memories of the vacation.
This is where smart financial planning comes into play. Now that you have five years to plan your vacation, allocating your funds towards suitable schemes will not only augment your budget, but also ensure that you are left with additional funds for financial emergencies, if any, during your vacation.
Most of the individuals would prefer depositing their funds in a recurring deposit account or savings account to accumulate a sufficient corpus for the trip. However, these avenues generate a very small return as compared to mutual funds. When building funds for a vacation, mutual funds beat other investment options by a huge margin!
Why Mutual Funds?
The answer is pretty simple. Unlike other conventional investment options, mutual funds generate significantly higher returns when it comes to recurring investments.
Don't have a lump sum amount to invest? Mutual funds also allow individuals to invest small amounts through a Systematic Investment Plan (SIP) on a regular basis to generate inflation-beating returns and accumulate a huge corpus over time. You can also choose the frequency of the payment, i.e. monthly, quarterly, bi-annually or annually.
What is Repo Linked Lending Rate, Home Loan? RLLR meaning, comparison vs MCLR
Now, you might consider utilising your credit card or availing a personal loan to fund your vacation. But here's what happens when you do so. Paying EMIs on your credit card or loan attracts high interest. Most credit card providers charge interests up to 20% p.a. On the same line, personal loans also attract higher interest rates. You might enjoy your vacation. However, you might also have racked up a debt in the process.
Investing in mutual funds is the best available option to fund your planned vacation. Depending on the scheme, you can enjoy returns ranging from 6% to 15%. Also, you would not have to worry about being debt-ridden as in the case of other options.
Here's how you can choose the right mutual fund to start investing for your vacation:
# Estimate the overall expense for your vacation. This includes your flight tickets, accommodation, travel and other miscellaneous expenses.
# Decide the date and time when you would like to go on your vacation.
# Depending on the time-horizon, assess your risk appetite and financial aspects.
# Budget your expenses and allocate a fixed amount to invest in mutual funds.
The last step is to pick the right mutual fund matching your requirements. Suppose you are 30 years old and are planning to go on a vacation 5 years later, i.e. when you are 35 years old. You have five years to build a fund for your holiday.
Now that your investment horizon is 5 years, a long-term mutual fund scheme could be the best possible option for you. Mutual funds can be classified mainly into three types:
Equity funds: These funds invest primarily in companies of various sectors to generate high returns ranging from 8% to 14%.
Debt funds: These funds invest in debt instruments such as government securities, T-bills and corporate bonds which ensure a fixed source of income. The rate of returns generated by debt funds generally falls between the range 6% and 10%.
Hybrid funds: These funds are a combination of both equity and debt funds. Since you invest in both kinds, not only will your investments have the stability of debt funds but also the growth of equity funds.
Suppose the estimated expense for your European trip is around Rs 3 lakh, start investing with just Rs 5,000 in a suitable mutual fund scheme with an average rate of return, say 10% p.a. through an SIP.
Though you would have invested a total sum of Rs 3 lakh during the next five years, the returns generated would accumulate to Rs 3.87 lakh. The extra funds can be utilised for other miscellaneous activities such as shopping, adventure sports, etc.
(The author is Founder and CEO, ClearTax)
(Disclaimer: This is the personal view of the author. Please consult your financial advisor before making any investment)