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Systematic investment plans are the best way to invest for your goals. Here are some smart strategies to make the most
Ask any financial planner the mantra for creating wealth in the long term and he would advise regular, disciplined savings in a carefully chosen basket of investments that suits your risk profile. Shorn of jargon, what this means is a systematic investment plan (SIP) in a good mutual fund can create wealth in the long term. SIPs are not only for the long term. You could be saving for the down payment of your house 15 months away or for your child's college education three years from now. An SIP is the ideal vehicle for goal based investing as it allows you to plan ahead and harness different asset classes.
We will look at a few smart strategies that would maximise the gains from SIPs.
Link SIPs to FINANCIAL goals
Any investment must have a purpose. It could be saving for your retirement, your child's marriage or a foreign holiday . It will not only let you monitor the progress of the investment for that goal, but also tell you how much you need to save every month. For instance, if you have to save 10 lakh for the down payment of your house in two years, even an SIP of 15,000-20,000 a month won't serve the purpose. If the objective has not been clearly articulated, you may miss the target. Spelling out the goal lets t you choose the most appropri ate asset mix for achieving it If you have more than 10 years, the asset mix should be heavily tilted towards equities (70:30) as the time frame al t lows you to take more risk. For t short-term goals of, five years or less, debt investments e should form the major chunk t of the portfolio.
Increase SIP Investment Amount Every Year
Although SIPs help u you invest regularly, i e does not mean you should e keep the amount fixed over the f entire tenure. As your income t rises, your savings must also go up. This means you can tar y get larger goals even though e your current income does no, allow big investments. For example, if you require a cor pus of 25 lakh after 10 years with 12% returns, you would . need to invest 11,000 every month, but if you increase the contribution by 10% each year, you would only need to invest 8,000 in the first year.
The step-up SIP can have a dramatic effect on your long term savings. As the graphic shows, even a 10% increase in the SIP amount can give you a 45% bigger nest egg. This is why the Provident Fund, which links the monthly contribution to the basic salary t of the member, is so effective as a retirement savings tool.
There are other benefits from the step-up approach as well. One, you reach your goal faster if the amount you need is fixed. You may have targeted to save 20 lakh for your child's education in 10 years, but increasing the SIP amount would help you achieve it in just nine years. Besides, if you raise the SIP amount, it will prevent you from blowing away the money if your income goes up. It will automatically prevent you from indulging in excessive spending.
The surplus savings need not be directed to an SIP in another scheme. Instead, one can simply increase the existing SIPs. Having separate SIPs for different goals does not mean that you invest in different funds. For some goals, you may invest separately in the same set of equity funds. If you have 4-5 different goals, you can plan for them using the same set of equity funds.
It is better to invest in a limited number of funds. The step-up SIP is a potent tool for new investors who don't have a high income.
Many get intimidated by the huge savings required for certain goals, such as buying a house or retirement planning.
Instead of losing heart, they should start saving small amounts and then scale up as their income goes up.
Suppose you need to invest 10,000 a month for a certain financial goal. If your current income does not permit that right now, don't junk the plan altogether. Start with 5,000 now and gradually increase it by 500-1,000 a year as per your convenience. A step-up approach can be used to gradually start moving towards your desired goal with whatever savings you have at the time.
STAGGER THE SIPs and AVOID BUNCHING
Fund houses have specific dates on which SIP investments are made.
Whether you are planning an SIP through the same set of funds, or different funds for each goal, it would be wise to stagger each investment across different dates of the month. So, if you have four active SIPs, spread them in a way that each SIP is made on a different date of the month.
This allows you to retain some liquidity in your savings account since the money does not flow out at one go. The bigger advantage is that you reduce the risk of market timing because the money gets invested on different days, negating any adverse market movements in the interim. If you are adding to an existing SIP, while giving a fresh mandate for the additional investment, you can specify any other date of the month on which the SIP instalment has to be paid out.
Having said that, the SIP mode is supposed to make life simpler for the investor. However, some variants of SIPs defeat the purpose. For instance, the Value Investment Plan offered by some fund houses keep varying the SIP amount on the basis of the returns the fund has generated. If the fund does well in a particular period, the next SIP is lower because the corpus is already bigger than planned. If it does poorly, the SIP amount goes up to account for the shortfall. Such investments only complicate things for the investor and should be avoided. Only extremely sophisticated investors should go for these plans.
Then there are fortnightly, weekly and daily SIPs as well.
We calculated the returns for several options in the past five years and found that there was no significant difference. The daily SIP is very cumbersome.
The monthly option is the best because it coincides with the income flow of the salaried person. The quarterly SIP has done well, but its returns are very volatile. Also, it will entail a lump-sum payment equal to three monthly SIPs.
When To Review Your SIPs
Even the best laid plans can sometimes go awry. This holds true for SIPs as well. You may have chosen the best fund, but there is no guarantee that it will keep performing well. Similarly, an unexpected turn of events could upset your calculations. A yearly review of your portfolio will keep you moving in the desired direction. If you have strayed from the path, you can make timely changes that will ensure you get back on track.
Here's how to go about it.
First, check whether your asset allocation is in synch with your original asset mix. If the portfolio is skewed towards a particular asset class, you need to rebalance it. Next, check the corpus accumulated against each goal to see if you are on track. Compare the performance of your funds against the return assumed at the time of investment. If the fund you invested in has generated less than the assumed return, you might be falling short of your desired target. If the underperformance is because the broader market is in a slump, then all you need to do is rebalance the portfolio. If the fund itself is underperforming, then it is a red flag and you should switch to a better fund.
Ending an SIP is almost as important as starting it. Continuing the SIP perpetually may not always be the right approach. At some point, you will have to get out. How do you decide when to stop? If you are not investing for a specific goal, this decision won't be easy. But if you have certain target in mind, you can end the SIP as the goal draws near. If the goal has been reached before time, it is advisable to shift the money out to a stable option. Exposing it to the market's vagaries for the remaining tenure will not be a wise move. Where the money requirement is for a bullet payment like a wedding expense, you must ensure that you set aside the amount much before the goal deadline.
On the other hand, if you have not managed to save the required amount, you may need to consider whether you wish to continue with the same SIP. If it is not performing in line with its peers, you may have to switch to a better alternative.
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