Just the other day, I had a word with one of my friends, Nikita over the phone. Talking on the phone was the only feasible option as I could not meet her because of the country wide lockdown owing to COVID-19. She was going on about, how her life is set and how she’s managing her money well to fund all her goals. So I asked her if she has insurance, her reply was a common one that anyone would give, “I don’t need insurance, I’m investing every month, which is enough to collect funds for my goals. On top of that I am just staying home and taking all precautions to avoid coronavirus”
Then I just asked her one question, which changed her whole perspective of thinking. That question was “What if you are no more tomorrow?” We usually live in a bubble that all bad things can only happen to others but not us. Even when we encounter someone’s family suffering because of no insurance, we still ignore it thinking that it can not happen to us.
It is obvious that we all should take precautions of social distancing, washing hands regularly, using sanitizer frequently, but the risk of getting coronavirus still remains as you will have to step out of your home as the unlock happens to resume your life as before. Not only for this deadly virus, but insurance is for long term protection from any major disease or accident which is uncertain.
Harsh isn’t it?
But it is a bitter fact. We all know, we are going to go sometime or the other, but no one knows ‘WHEN’. When it comes to finance, you have to think of all aspects before planning your finances. You may have the perfect plan, to use your current resources to reach your goals, but you still have to consider the fact that, what if you’re not around tomorrow?
Read More :- 7 Reason Why You Should Buy Insurance
How will your investments continue to reach your goal? Didn’t think of that, right?
Now here comes Insurance + SIP, to complete your investment package. When we say insurance + SIP, we are talking about term insurance and SIP in equity, since this is the perfect combination.
Let me explain why.
Term insurance has a cheap premium with a reasonable cover, whereas SIPs in equity is profitable in the long run. So on one hand you’re covering your life and on the other, you’re funding a long term goal.
Now the question here is how does this become a good combo?
Say an insured (Nikita, for example) has taken this combo, and is paying a SIP of Rs.15,000/- per month. After 5 years, the insured dies, so what happens to the investments? Of course the death claim will be given, but the SIP will stop.
Now think, what if I said, the SIPs don’t have to stop.
Well, the family can use the claim amount to continue the SIP along with the expenses. That way, the goal is not compromised, and the family is happy financially!
Let us take an example to make it more clear, Mr. Ronak, aged 30 years, working for a leading oil and gas company, has a wife Sarita, 28 years, and a son Rohit, 1 year old. He heard about the new combo of SIP + insurance, and loved it. So he decided to go ahead with taking a term plan for 30 years and started investing through a SIP, for creating a corpus of 1 crore at retirement.
He also explained to his wife how this new product works. At the age of 45, Ronak met with an accident, and did not survive it. Sarita is now responsible for all the decisions in the house. She gets the insurance claim but is not sure how to manage it.
Suddenly she remembers Ronak’s explanation of why he took the insurance policy. So she continues the SIP investment with the claim amount and at the end of the next 15 years, Sarita successfully creates a corpus of Rs. 1 crore.
Note: The above example is given to make the concept of Insurance + SIP clear. The corpus can be either less or even more than the desired corpus. This is because investments are subject to market risks.
Now since the basic concept is clear, let’s go one step higher.
Taking the same example, what if Ronak wants his family to get Rs.20,00,000/- at the time of his death, that will suffice their basic expenses at that time. Well the solution is very simple, just add this amount to the death claim amount, that Ronak’s family will get.
For example, if Ronak has taken an insurance policy cover of Rs.1 crore, he should add Rs. 20 lakhs to that amount. So his family will get a total claim of Rs 1.2 crores. So 20 lakhs can go towards the family’s expenses and the 1 crore can be used to continue the investments and monthly expenses.
Okay one more question that may pop up, where will you invest the entire claim amount? and how will you continue the SIPs.
There is a solution for that too, let’s see the different ways of investing the amounts:
- Bank – SIP – Equity fund: This is the normal way of investing, the amount is deducted from the insured’s savings account every month and it goes to the equity fund.
- Debt – STP – Equity: STP is Systematic Transfer Plan, i.e. money transferred from one fund to another. Here the nominee , on death of the insured, can invest the whole claim amount in a liquid fund (also a debt fund) and through STP, transfer a fixed amount from that liquid fund to the equity fund. This will help in continuing the SIP. This option is recommended as you may earn more in liquid mutual funds than in saving bank accounts.
- Equity fund – SWP – Bank: SWP is Systematic Withdrawal Plan. It is used to withdraw a fixed sum from the fund into the bank account for monthly use. So here, Once the corpus has been achieved, the nominee can make monthly withdrawals from that same fund, for their daily use.
Please note that above options are given in respect to the concept of insurance + SIP.
This is a very good combo, for those who find insurance very boring or those looking to benefit from insurance. We all think of what is in front of us, but this is a concept which makes you think of possibilities that can occur. It may not strike us at the time of planning. But when the incident does occur, it will be too late.
Looking at the current market situation, you might feel this is not the right time to invest as the markets are volatile due to slow economic conditions owing to global spread of deadly coronavirus. The impact has aggravated in most sectors due to extended lockdown in the country which is now at a stage of phased unlock.However, to create wealth for the long term, this would be the best time to invest in equity markets. Wise people say, “little drops of water make up the mighty ocean.” And it is amazingly accurate and perfectly fits the wealth appreciation through mutual funds SIP.
SIP is just a modest way to start a mutual fund portfolio and it can prove to be the most powerful tool for wealth building.
What Is SIP?
SIP refers to Systematic Investment Plan, which is similar to recurring deposit in a way that a specific sum of money is required to be invested periodically. Generally, a bank account is required to be assigned for direct debit or ECS facility for such SIP investment. Every mutual fund house offers investment in mutual funds through the SIP route.
Advantages of SIP
SIP can be started with any minimum sum prescribed (minimum Rs.500 per month), but afterwards can be topped up with additional sum of money as and when excess funds are available. This means that additional units can be purchased through SIP route as and when excess money is available. Such flexibility increases the attractiveness of the SIP route.
- Compounding effect
SIP leads to wealth appreciation as the amount contributed periodically is invested over and over again along with the return earned on the principal. This yields better when the investment tenure is longer and the investor has entered into the investment at much early age. Compounding effects can provide for a good swell in your mutual fund portfolio.
Even a small investor can enter the mutual fund investments through the SIP route. This is because, only a specific sum committed at the beginning of mutual fund SIP is required to be invested periodically.
Even conventional and conservative investors can easily opt for SIP route, because money at stake is much lower (even if we accumulate lowest contributions for a longer term), but return on such investment and wealth appreciation is very lucrative, especially in case of equity mutual funds. So those who do not wish to enter the stock market directly, but wish to enjoy stock market ups and downs, SIP is an ideal way to go in.
- Professional management
Even though you are sparing for management fees while you purchase a mutual fund through SIP, it is worth every penny spent, because your funds are managed by experienced and academically well off fund managers. This gives you an extra edge over common equity shareholders, who trade in the markets on the basis of individual experience and study.
- Inflation effect
Inflation is the real enemy of your future income earning capacity. Inflation reduces the returns in real terms. For e.g. if Rs.100 is what is needed to buy 10 bottles of juice, then considering 10% inflation rate, next year, you will only be able to buy 9 bottles of juice.
This means that inflation reduces the purchasing power, thereby creating a need for inflation adjusted returns in the long run. Mutual fund returns are usually inflation adjusted, as there they provide returns more than the inflation rate in the long run.
- Rupee cost averaging
SIPs give us an added advantage of rupee cost averaging which refers to lower average costs than different individual purchase costs (which at times may be higher in case the markets are bullish) of various lots of mutual fund units, purchased at different point of times.
Rupee cost averaging yields better results especially when markets are bearish and end up in down trending stock prices. This results in lower NAV, meaning that a fixed sum of SIP amount will be able to purchase more number of units as compared to a bullish market scenario.
SIP in mutual funds is not restricted only to equity markets, but also to debt funds or hybrid funds or even gold funds etc. There could be any type of underlying asset for the mutual fund, so if you invest in different types of mutual funds (equity, debt, hybrid, gold, emerging equity, GILTs etc.) with a minimum sum allocated to each of those, you may enjoy a balanced bouquet of returns as well as decent wealth appreciation as compared to conventional modes of investment like bank fixed deposits etc.
How to build a mutual fund portfolio through SIP?
- Diversification is the key
As discussed herein before, mutual fund SIPs are the cheapest way to diversification within the investment portfolio. Hence, it is important that you should invest in SIPs of various mutual funds with different underlying assets like equity, debt, gold etc. This would offer you superior returns, when markets are spurting growth and at the same time, will ensure minimum risk to the principal invested, when markets are falling down.
- Align your mutual fund to your financial goals
Every individual has different financial needs and hence has different financial goals at each age group. Hence, it is better to align the mutual fund SIPs according to your investment strategy based on long term and short term financial goals. For e.g. it is better to invest in equity mutual funds SIP, if you are investing for your retirement corpus which is a long term investment.
- Don’t hustle
The markets are usually much heated and are very volatile, so it is very common that NAV will keep fluctuating every now and then. However, there is no need to panic and get out of mutual funds, when markets fall down. If you stay put for 1-3 years for short and mid-term goals and 5 or more years for long term goals, then you may very well be richer than you already are, giving you benefit of rupee cost averaging.
- Age appropriate investment
For e.g. if you belong to the age group of 25-35, then equity exposure in your mutual fund SIP portfolio should be almost around 60-70%, which would earn superior returns and will offer tax benefits also (for equity), thereby increasing the effective rate of return.
Reverse is the case when your age progresses, which means you should concentrate more on balanced funds which provide reasonable returns with moderate or low risk.
- Focus on long term
If you are investing in SIP for mid-term or long term goals like kid’s education or retirement planning, then it would be better if you are invested for at least 3 years in any particular mutual fund. For e.g. compare the returns generated by any mutual funds for 1 year, 3 year and 5 years. You could observe that funds have generated higher returns in 3rd year or 5th year. This is because of the compounding effect.
Now that you are aware of all the features and benefits of investing through SIP, do not waste any more time and start investing. You can download the Fintoo App to start your SIP today.