The Secret of Goal-based SIPs?

Today SIPs is not new phenomena as it has been become so popular and powerful investment tool to invest in equity. The beauty and appeal of SIPs has also been reached to those gullible people who are averted to invest in equity as they are not supposed to want to invest in equity but keen to invest in SIP. The reason lies in psych as it is the simplest way of investing a fixed sum regularly in an equity fund, irrespective of any market conditions. In the long term, you could benefit not just from compounding but also rupee-cost averaging as you end up buying more units when markets are down and fewer when markets are up. Thus, your average price of acquisition could be inevitably lower than what it would have been had you tried to time the market by trying to predict and anticipate its movements. While bearish in market, many investors are ironically induced to stop investing either due to scared or trying to catch falling a knife. Conversely, in a rising market, they are prone to invest more, this eventually could fire back. The secret lie in SIP is to help you to get rid of both these cycles and behaviors with cautioned that it is not magical tool that gives you a guaranteed superior return. The choice of fund and periodical review of performance is so much crucial that you could not even make good returns while doing SIPs is in an underperformer.

Rupee Cost Averaging

When you invest through SIPs, you get automatically the benefit of rupee cost averaging. Rupee cost averaging means that as you invest periodically (mostly monthly), you accumulate the units of a fund at various prices (called net asset value, or NAV, in case of a fund). You get more units when the market is down and you get fewer units when the market is up. Over time, as your SIP progresses, you will have invested across all market phases. So your average cost could be reasonable. Let’s see this with an example. Suppose you do invest Rs 10,000 in a fund through monthly SIP at the following NAVs: Rs 100, 150, 50, 100 and 200. You will accumulate the following number of units: 100, 66.66, 200, 100 and 50 respectively. While your total invested amount is Rs 50,000, the total accumulated units are 516.66.  The result is your net NAV comes averaged out at Rs 96.77 which will be less than four of the five NAVs at which you bought the fund. Since SIPs are not magical tool that it always gives you lower down your investment cost, it can increases the cost of investment in a linear rising market. However, markets are mostly remained in volatile mode and hence it makes sense to spread your investments to benefit from the lows that occur frequently. Unfortunately, investors are tempted to invest more when the market is racing and stop investing altogether when it is falling. This gets backfire in returns. The continuation in SIPs is automated investment process and delinked your sentiment from investing, allowing you to benefit from rupee cost averaging and get maximum bang for your buck.

SIP for your Children’s Future

Every parent has inherent a lot of responsibilities to look-after their children from childhood expenses to their wedding expenses.  These expenses are not just limited to look at Children upbringing expenses but also extend to long-term planning for their children future starts with first listing the various long-term goals, like higher education and wedding. When we come to estimate the higher education goal amount for our children’s future, many parent get clueless since such calculations are done by estimating the amount in today’s rupee terms and then inflating it by a certain rate. This rate is the rate of inflation. ‘Inflation’ is nothing but the price rise that you see happening over time. For instance, if you will need Rs 10 lakh for your child’s education today, 10 years hence, you will need Rs 25.94 lakh if the cost of education rises by 10 per cent per annum. Having known the target amount, you can start to invest accordingly through monthly SIP in a mutual fund over time to build a required corpus at desirable rate. Alternatively, you can seek help of a financial planner.

SIP for your Retirement Planning

Every working salaried-class or businessman would retire from their work at one day and their regular income would be likely to stop post retirement. Gone are the days when most people worked for the government and were paid pensions. With increasing life expectancy, it’s even more important to plan for post retirement expenses. Your retired life may be as long as 30–40 years and with diminishing capability to engage inactive work, your accumulated corpus gets even more crucial. The best time to start saving for retirement is when you start working. At that stage many of us don’t realize the importance of retirement planning as so many spending avenues available, saving is the last thing that comes to our mind. But consider this: if you start doing a monthly SIP of Rs 10,000 in equity fund (that returns 12 per cent yearly) when you are 23 years and keep increasing this amount by 10 per cent yearly, at 60 years, you can generate accumulated corpus about magical Rs 23 crore. No, it is not magical; it is the result of simply the power of compounding and discipline. SIPs, short for systematic investment plans, bring discipline to your investing. They help you build a large corpus from small investments over a period. Naturally, the earlier you start, the smaller the investment you will need to reach your estimated retirement corpus.

SIP for buying a House

Every individual may be dreaming to buy own house but it does not come easy way as the price of a decent accommodation is generally so high that few of us can buy it. For many of us, buying  a house needs to take a loan from bank but in most cases, accumulating a corpus for down payment is the key challenge in order to buy a house.  For instance, a house worth Rs 1 crore may require a Rs 20 lakh down payment. The balance Rs 80 lakh is than loaned by some financing institution. Investing regularly in mutual funds through SIPs can make the process easier and more effective. Let’s say, you save Rs 20,000 per month and you want to accumulate a corpus of Rs 20 lakh. You put your monthly savings in a sweep-in fixed deposit that yields 6.5 per cent. In order to accumulate Rs 20 lakh, you will require 6.65 years. Now if you invest the same money in a good equity fund through SIPs, you will be able to accumulate the required corpus in 5.76 years, assuming that the fund returns 12 per cent per annum. However, careful financial planning can make this job a lot easier.  Of course, you can avoid taking a loan, if you can have a longer term horizon for accumulating the entire corpus required to buy a house.

SIP for Vacation Planning

Anyone can go on a dream vacation only if he/she takes the time to invest systematically and stay disciplined about it. You can create a ‘vacation fund’ through monthly SIP but subject to after you have invested for your retirement and other crucial goals like the education and wedding of your children. With time, as your income increases, you can raise the SIP amounts going into your vacation fund.

The Secret lies here

In investing parlance, if you start early, you can build substantial wealth over time and achieve your goals easily. But what if you are middle-aged already and haven’t started investing; you can still achieve your goals by being disciplined and prudent. If you are starting late, your investment strategy should have two legs: investing a higher amount systematically and channelizing your old existing investments into equity. Let’s confess it. If you start investing early, you will have to contribute smaller sums to arrive at your goal corpus. So, when you start investing late, you must make up for the lost time. Let’s say you want to accumulate a corpus of Rs 1 crore by 60 years. If you start investing when you are 25, you need to do a monthly SIP of  Rs 1,540 in an equity fund to arrive at this amount. If you start at 40, you will have to contribute Rs 10,009. (In both the cases, we have assumed an annualized return of 12 per cent.). Equity beats other investment classes over the long term and is even more crucial when you have limited time at hand. But a word of caution: with equity, keep a long-term horizon. Equity is volatile in the short term, so don’t panic if the market falls. You should increase your SIP amount yearly as your pay increases but then invest it evenly till the next revision.  Invest through SIPs. SIPs ensure that you average out your investment cost over time, which improves your returns.

The Second part of your strategy you should first of all make a list of all your investments done so far. Then analyze them individually. For insurance, go for term-insurance plans only and should surrender your other unit-linked and endowment policies. Unit-linked and endowment plans provide neither good returns nor sufficient insurance. Likewise, reduce your PPF contribution to the minimum so as to keep the account active until maturity. If you save income tax through the PPF, you can opt for a good tax-saving mutual fund. Similarly, If you have invested in property (other than the house you live in), you can consider selling it and moving the money to equity funds systematically. Land and property have a poor return profile as compared to equity. Also, they are illiquid and managing them is fraught with hassles. In order to make systematic transfers, first park the corpus in debt funds (they should be from the same fund house as the equity fund to which you want to transfer the corpus) and then transfer it to equity funds over time. Don’t make a lump-sum transfer into equity funds as you may catch a market peak. What’s more, share this SIP secret with some of your friends and they can also join you on the ride of Goal-based SIP. The more the merrier.

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