Mutual Fund SIP's: An Investment solution for all your Dreams!

Mumbai | November 24, 2016 09:08 IST

Mutual Fund SIP's can be the best solution to achieve your financial goals if started early.

Mutual Funds
Everyone has some goals and responsibility in life, some want to buy a new car and some are planning to retire rich so that they can enjoy their post-retirement life. We all have many dreams, but are we really investing that much time and money on building the corpus to achieve these goals. It is time tested that if one starts investing early, the percentage of building the corpus for one's desired future financial goals is higher as compared to those who start very late in their life. Before we jump in to explain to you the benefits of investing early, let's quickly understand the term SIP and it's benefits.

A Systematic Investment Plan (SIP) is a simple and smart mode of investing money in mutual fund schemes. SIP allows you to invest a pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.), which is at the same time less risky as compared to directly investing in the stock market because of the below mentioned benefits.
 
Benefits of SIP's:
SIP's comes with many benefits and one of them is ''Rupee Cost Averaging'', which allows investors to get rid of market volatility, i.e. your monthly investment buys fewer units of Mutual Fund when the market is high and more units when the market is low as NAV of mutual fund schemes rise and fall basis on that. Now let us understand how Mutual Fund SIP can actually help you achieve all your financial goals.
 
Choosing the right Mutual Fund SIP:
Choosing the right mutual fund scheme depends upon your risk appetite and investment objective. The objective clarifies your risk appetite and hence lays the foundation of your mutual fund portfolio. All your investments should be made only after assessing your investment objective and risk appetite.
 
Pointers to ponder before investing in Mutual Fund SIP:
  • You must link each SIP with your financial goal.
  • You should evaluate the mutual fund scheme and fund manager's performance before investing.
  • You should keep your mutual fund portfolio well diversified to avoid any risk.

Invest early with less money, and you could still be ahead of those who save later: 
In this example, Investor ''Mr. A'' starts investing at the age of 30, but only contributes Rs 3,000 per month to his investments in building a corpus for retirement at the age of 60 years. A second investor i.e. ''Mr. B'' starts at the age of 40 but even with higher contributions i.e. Rs 5000 per month, does not catch up to the net worth of the first investor when they reach the age of 60. The assumption is that both investors earn 15% returns every year.

Mr. A: Starts at the age of 30 years

Summary for SIP Planner:
Computation of accumulated amount for a fixed monthly outgo
Amount that Mr. A invests every month 3,000
The period for which Mr. A invest this amount every month (Years) 30
The rate of return that Mr. A expects from his investments (%) 15
Mr. A accumulated Rs 2,07,69,839 in 30 years at the expected rate of return 15%.
 
Mr. B:  Starts at the age of 40 years

Summary for SIP Planner:
Computation of accumulated amount for a fixed monthly outgo
Amount that Mr. B  invests every month 5000
The period for which Mr. B invest this amount every month (Years) 20
The rate of return that Mr. B gets from his investments (%) 15
Mr. B accumulated Rs 74,86,197 in 20 years at the expected rate of return 15%.

Mr. A was able to generate more than Rs 2 crore in 30 years by contributing Rs 3000 per month, where else Mr. B contributed Rs 5000 per month and still made only Rs 75 lakh at the age of 60 years with same rate of returns i.e. 15%. The reason behind this short fall is that Mr. B started investing later in life i.e. at the age of 40 years, whereas Mr. A smartly started at the age of 30 years only and got the edge of compounding on his investment. So for Mr. A, it is actually power of compounding that worked. Let's understand how compounding actually works for us -

 
Power of Compounding: How it Works
1. It means that the return on your investment themselves become part of the investment and start generating returns.
2. The arithmetic of compounding means that investment starts generating disproportionately higher amount after some years.
3. It makes your long-term investment more rewarding.
 
So even if you stop contributing in between, you could still be ahead as the part of your investment will itself start generating returns for you.
 
Diversify mutual fund portfolio:
Diversification is one of the many advantages of investing in mutual funds. Basically, diversification is spreading your investment within the same asset class but in different companies or maturities. You should keep the right percentage of mix of Large Cap, Mid Cap, Small Cap, diversified equity and Value Style funds in order to diversify your overall portfolio. You can take a help of your financial advisor who can help you keeping your portfolio well diversified based on your risk appetite and investment objective.
 
Final words:
Once you are done with prioritizing your financial goals of life, quantify them, that how much amount you may need to achieve those goals and based on that choose mutual fund schemes.

The objective of the investment and your risk appetite lays the foundation of your mutual fund portfolio. One should always invest after assessing one's objective and risk profile. Any investment made without a financial objective lacks in discipline and one cannot quantify it.

Before taking a step forward do consult your advisor in order to assess your risk appetite and try keeping your mutual fund portfolio well diversified, i.e. a perfect blend of right mutual fund schemes in order to avoid any market risk. So give wings to your dreams and start investing in something each month to achieve your goals without any burden of heavy debt on your shoulder.

The author Vishwajeet Parashar is the Senior Vice President and Group Head – Marketing, Bajaj Capital.
 

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