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 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 the 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 a 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.
Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
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Investment is indeed a very good option to begin with managing your finances and to put the money at work for you. The investments are not just to grow your money but they are also a way to secure the future of yourself and your loved ones. It leads to the ownership of various assets and can also get you a high amount of returns on the investment capital.
Before you begin with the investment of your wealth into the various schemes in the market, you should always acquire the apt information about the schemes and plans. The investment can lead to a successful attempt gaining you profits or it can be a failure leading to some losses. So it’s important that you make an informed decision by understanding how and where to invest. It is suggested that you do not take any decision in haste. The investment not just helps you in gaining the returns over the invested capital income but it also helps in reducing the net taxable income during the filing of the tax returns.
Investments should be made as soon as a person starts earning. Starting the investments in the early stages of earnings can help you to create a very strong financial portfolio. You can own a lot of assets by making proper financial decisions.
What Is The Importance of Investment?
- Investment helps you to put your money into work so that you can gain maximum returns out of it.
- It helps to cope up with inflation. So that you don’t have to compromise on your lifestyle.
- Investment helps in reducing the income tax returns.
- Investment plans can provide you money in the times of need and uncertainties.
- Investments are made for securing the future of the individual and his loved ones.
- Investing into the schemes helps to create a strong financial portfolio.
So, now we know the importance of investing. We understand that making investments may seem complicated for the first time investorsas it can be confusing at times. Also, as a first time investor we recommend Mutual Fund investments rather than investing directly into share market. So here are few moves for a first time investor that would help you to get started for the best experience of investing through Mutual Funds
- Get your KYC done: First thing any new investor needs to do is complete KYC process. You can also get it done online, called as eKYC. eKYC is a paperless Know Your Customer (KYC) process. It is a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address. The purpose of authentication is to enable a person to provide their identity and for the service providers to supply services and give access to the various benefits. Without KYC, you can not start investing.
- Decide a Goal: Once your ekyc is done, the next step is to decide a goal for which you would want to invest. The goal could be anything like buying a house or a vehicle, higher education expenses, wedding cost, retirement etc. It is suggested that you do not just invest anywhere because you have surplus cash. Deciding a goal before making an investment is crucial because your investment decision has to be based on your goal. Goal based investing will be fruitful in achieving your needs and wants.
- Understand the time horizon: Once you know the goal, you will understand the time you have to achieve that goal. Your goal could be a Short term goal, Medium term Goal or Long term goal. Short term goal is upto 3 years. Any goal between 3-5 years is considered to be a Medium term goal and all the goals beyond 5 years is a long term goal. For instance, if you would like to invest for a retirement goal which is 30 years away, it is considered a Long term goal. If you need to invest for buying a house which is say, 2 years away, it is considered as a short term goal.
- Analyze different types of schemes – There are broadly three categories of mutual funds namely Equity Mutual Funds, Debt Mutual Funds and Hybrid Mutual Funds. With a plethora of mutual fund schemes in each category, you need to analyse and compare them to pick the right one. Investor should not ignore factors such as the fund manager’s credentials, expense ratio, portfolio components, and assets under management.
- Don’t put all your eggs in one basket- Your funds should be diversified between many sectors and not one. If one sector under performs than the loss incurred can be hedged with the good performance of another sector.
- Analyze the timing of your investment- Time is an important factor that should be considered while parking your funds in Equity market. You may end up losing everything if you ignore the timing of your investment.
- Be patient- Investment in equity market will fetch you long term returns. If you panic looking at the loss in your portfolio after a quarter and you plan to switch your investments, it would be better if you hold for few months. If you have invested in good top quality funds than as soon as the market improves your investments would start giving you positive returns.
- Hold the best, sell the rest- Usually, investor have an approach of “ Sell the best for profits and hold the rest to improve.” But ideally the approach should be “Sell the rest for avoiding further losses and hold the best for balancing your portfolio.” It doesn’t make sense holding a stock for 5 years or above if it is giving negative returns.
With these few tips you can start your journey of investing. It is also advised that never expect big returns while you invest for the first time in Equity market. There would be many hurdles in between but if you plan your investments well, you would definitely win the race.Don’t get demotivated by the loss incurred in your 1st investment, you should pat your back because you got to learn many things about the market that would help you to multiply your investments in the long term.
When it comes to saving taxes, there are myriad options available but nothing works like Equity Linked Saving Scheme. ELSS or Equity Linked Saving Schemes comes with a lock-in period of 3 years, which is the shortest holding compared to all other tax savings. By Investing in ELSS, one can attain deductions up to INR 1,50,000 from their taxable income as per the Section 80C of Income Tax Act. As ELSS funds are equity diversified with a major portion of the fund being invested in equity & related products, they provide equity returns too. This means that investors can also earn equity returns on their investments.
Owing to the popularity of the funds, there is an option to invest through both the dividend and growth options. Investors get a lump sum on the expiry of 3 years in growth schemes while in a dividend scheme, investors get a regular dividend income, whenever declared by the fund, even during the lock-in period.
Who should invest in ELSS?
The ELSS is the best option for individuals who are looking for investment avenues which will yield decent returns in the long run, and provide tax-saving benefits also. It is ideal for investors who are looking to invest money for at least 3 years and are vouching for additional benefits of income tax saving coupled with higher returns expectations. All in all these investors should also be prepared for the possibility of moderate losses since the funds invest in equity stocks.
The top ELSS schemes to invest in the year 2020
1) Axis Long Term Equity Fund:
- An open-ended equity scheme generating long term capital appreciation
- Statutory lock-in of 3 years and tax exemption on investment
- The highest value of total assets under management
- Whopping returns of 20.25% in the 7 – year time frame.
- Fund Allocation: 98.52% investment in Indian stocks of which 67.01% is in large-cap stocks, 17.01% is in mid-cap stocks, 6.72% in small-cap stocks
2) Kotak Tax Saving Scheme
- Fund Allocation: 97.64% investment in Indian stocks of which 47% is in large-cap stocks, 29.68% is in mid-cap stocks, 11.73% in small-cap stocks.
- additional benefits of income tax saving apart
- higher returns expectations
3)DSP Tax Saving Fund:
- An open-ended equity mutual fund scheme,
- invests in equity and equity-related securities of high growth corporates
- more than ₹6,000 crore fund size
4) Mirae Asset Tax Saver
- invests in equity stocks of flourishing companies
- the fund is relatively new compared to other top ELSS funds
- since its inception, it has delivered whopping returns of 19.39%.
5) Aditya Birla Sun Life Tax Relief 96
- asset allocation in equity securities to foster significant capital appreciation in the long run.
- it has allocated around 44% of assets to large-cap stocks.
- provides substantial stability against market volatility.
What are the advantages of investing in ELSS?
Even with the risk involved, ELSS is capable of delivering significantly higher returns as compared to traditional tax-saving instruments.
ELSS has the lowest lock-in period amongst all other tax-saving avenues. The lock-in also develops a disciplined approach in the investor.
The ease of transacting in an ELSS scheme is available with the Systematic Investments Plan approach.
Any investor has the option of investing either online i.e through investment platforms (Fintoo) or by visiting the AMC’s websites. One can also fill out the form and submit it at a nearby branch of the fund house, or invest through a broker (offline mode)
What are the drawbacks of investing in ELSS scheme?
ELSS is not available for those who are risk-averse and want safer options since ELSS invests in equity stocks. So it is advisable to steer clear from ELSS if you are not willing to take a risk. Also, due to the lock-in period, you can not withdraw the money before the maturity date. Park your funds in any other option if you need liquidity.
Invest in the ELSS scheme now for better returns and tax benefits