SIP: Your Financial Life Partner
Source/Contribution by : NJ Publications
The investors and advisors who believe in Mutual Funds, who have time tested the quality of the product in terms of its returns and dependability, also affirm that the best approach to investing in Mutual Funds is through SIP. SIP is a tool which lets you invest a predefined amount at regular intervals in Mutual Fund Schemes. An SIP enables you to actualize your goals in a smooth and systematic manner. The step by step model of investing imparts discipline and offers convenience in investing, while the goodness of Rupee Cost Averaging and Power of Compounding render generous returns.
Mutual Funds and investment houses have been propagating that SIP's can help an investor in achieving all his life goals. This article concentrates on how an SIP can help you achieve your goals and eradicate stress from your life by filling in the gaps where necessary.
All of us have our own set of dreams and goals. Many of us invest for our goals, while others are still living in a la la land. For the former set of people too, who do invest for their goals, there are some goals and there are some investments. However, the goals are not penned down, and the time when these goals will arrive is also not identified. The goals are hovering in the investor's mind and there is no proper alignment between the investments and the goals, people invest in random instruments and for random number of years. So, the end result is when the goal arrives, sometimes your investments are not enough, or they aren't yet ready to be liquidated.
SIP is an excellent tool to overcome the chaos. What you need to do is sit with your financial advisor, define your goals, along with the distance you need to travel to achieve them, in terms of time. Your advisor will help you determine the approx amount that you would need for each goal. The advisor will do the math and let you know which funds you should invest in, and how much you need to invest at regular intervals, so that when your goal arrives, you have the money to fulfill it. There will be one SIP for one goal and this monthly (or quarterly, or bi-annually) amount is your SIP installment.
This SIP installment is a small amount that you need to carve out from your monthly income, and before you realize this small amount starts contributing big to your life. An SIP is your financial life partner and it's there for you for all kinds of goals, be it short, medium or long term goals or whether it's worth Rs. 20,000 or Rs 2 crores.
Let's see how an SIP is a foolproof mechanism to provide a solution to all your life goals.
Let's say you saw a Rado in a mall a few months back, and it was love at first sight. You saw the price tag Rs 38,000 and sighed, you are too expensive to be curled up around my wrist! Now whenever you pass by that store, you ogle through the glass wall, just to steal a look at the jewel. Did you know? You can gift yourself your fantasy on your next birthday, with the help of an SIP. Assuming the Rado will cost Rs 40,000 after a year and you will get a 10% return on your investment, you need to do an SIP of just Rs. 3,164 a month and own your desire.
Similarly, SIP's builds the path for all other life goals, be it a near term small goal like a Manali vacation in a year, or funding for your kids' education in 10 years or saving for a peaceful retirement after 20 years, SIP is the key to all the riddles of your life, and it won't let the goal pinch your pocket when it arrives. The best thing you can do to sort your life is start one SIP for one Goal.
An SIP not just caters to your dreams, but also acts a fulcrum in your everyday life.
> Save Taxes: In order to avoid the last minute hassle and to avoid worrying about accumulating a huge sum in the last moment, you can simply start an SIP in an ELSS mutual fund. So if you need to save Rs 150,000 for tax purposes, you can break it down into 12 SIP installments of Rs 12,500 each. This way, you'll be able to meet your tax goal comfortably, as well as benefit from high and tax free returns by investing in equity and having a minimum lock in period of three years.
> Emergencies: You can start accumulating for uncalculated surprises through SIP. You can start with a nominal sum, like Rs 2,000 a month, so that whenever an emergency arises you have a back up plan ready.
> Gold: With an SIP in a Gold Fund, you can gradually accumulate enormous gold.
An SIP can support you for all your life goals, and more effectively if you increase the SIP amount as your income increases.
Consider another example, a very important life goal, you have a 10 year old daughter, and you want to invest for her wedding. You want to have a lavish wedding and the estimated cost of the wedding 15 years hence is Rs 50 Lakhs. So, you need to start an SIP of Rs. 5,740 and increase it by 10% every year, and you'll have Rs 50 Lakhs for your daughter's wedding 15 years hence. (Assuming 12% CAGR)
So, you see how simple it is to witness the big moments in your life materializing in the manner you have always dreamt of. All you need to do is squirrel out a small amount each month for your goal, and see the magic that your SIP does for you!