Every individual has certain goals and aspirations in life. Short term goals include going for a dream vacation or buying a flashy car whereas long term goals include financial planning for the golden years of life, child’s education or even buying the dream abode. But for turning these dreams into reality we need backing of an adequate corpus. It has been proved time and again that starting with a properly planned investment early in life shoots up the probability of building up the required corpus.
Related Article :- How to provide your child with the best education using SIP
Systematic Investment Plan (SIP) comes as a full proof answer to all the corpus building woes of investors wherein they can invest a pre-determined sum of money at regular intervals in various mutual fund schemes. This hassle free and smart investing mode inculcates the wealth building and saving habit of investors. SIP keeps the investors abreast of market volatility by its “Rupee Cost Averaging” feature which buys more units when the NAV is low and less units when the NAV is high.
But choosing the right kind of SIP as per the concerned requirement is of utmost importance. Like for long term plans investor’s portfolio should consist of greater equity component and for short term plans, fixed income schemes can provide steady returns. Risk appetite of an individual also has bearing upon the type of SIP he wishes to proceed with. Investors generally find the SIP calculation to be too tricky. But being armed with an excel sheet and the required statistics can give a shape to this magic figure in no time. In today’s article we will provide a step by step guide of how to proceed with the same.
Background checking of the SIP market
- It’s better to go with older funds as they have an historical track record for investors to analyse and take a cue from. The “alpha” yardstick serves as a benchmark for investors to gauge fund performance as a positive alpha shows appreciable fund execution and vice versa.
- It’s also advisable to go for popular Fund houses.
- Expertise of the fund manager has an enormous effect on the performance of the fund.
- Investors can examine the historical performance of funds managed by the fund manager especially during times of crisis.
Deciding on the corpus amount
Investors are required to come up with real figures as mental calculations which provide a false sense of comfort can be very dangerous. The figure needs to have a realistic justification and should not be selected randomly.
Gauging the in hand time
Investors need to have a realistic time frame while proceeding with the investment. Starting with a small corpus and planning to reach the 1 crore mark in two years is simply impossible.
Purchasing power of money decreases with time thanks to the inflation effect. Ten years down the line, a bottle of Pepsi might cost double of what it costs today. Thus investors need to inflate their desired corpus amount in order to ensure enough financial resources for their goal realisation.
The Excel calculation shows that assuming an inflation rate of 7%, investors need to build a corpus whose future value is 7739368.92 INR in a span of 20 years to fulfil a goal which requires 2000000 INR at present.
Expected Return Analysis
It is advisable to maintain a conservative approach while stating the expected return. Investors should not go overboard looking at a particular years bombastic performance but should analyse historical figures of an elongated time frame.
Calculating monthly SIP premium
The PMT formula in MS Excel can be used to estimate monthly SIP premium required to reach the aspired goal. In our example we need to invest 7746 INR monthly to achieve the desired goal of 77,39,369 INR at the end of 20 years.
It’s easy to start with an SIP plan but equally difficult to continue with the same given the ever-increasing expenses and other temptations which are a part and parcel of life. Thus investors need to follow a disciplined approach of adding further units without forgetting to set aside some cash for contingencies.
Kanika is a 27-year-old, HR Manager in a bank, and is living with her husband Suresh, who is 31 years old, and her newborn baby girl Alia. Kanika wants to make sure that Alia’s future is not compromised on, as she has big plans for her. So she wants to start planning for it now. She approaches her adviser and gives him the relevant details of her plan. After much analysis, he tells Kanika, that she is still young and can have an aggressive investment approach, so why not invest through SIPs? and make use of Power Of Compounding.
Systematic Investment Plans are commonly known as SIPs. They are a fixed amount of regular savings, that go into mutual funds, which are nothing but a pool of funds collected from many investors for investing in stocks, bonds and other money market instruments.
SIP is an investing tool related to mutual funds. It inculcates a habit of disciplined saving. The magic of SIPs do not work overnight, but it works on the investments, collected over the years. This magic of SIPs can be understood if we understand the Power Of Compounding. Why do we water our plants regularly? So that they grow into a beautiful tree, right? It cannot happen overnight, it takes years for it to grow into a tree. Also, it needs to be taken care of every day, for it to grow properly. We can apply the same logic to SIPs. To create a huge corpus, you have to regularly water it with SIPs and over the years, it will grow into the corpus you wish for. This process of growth is called the Power of Compounding.
Power of compounding means earning interest on ‘interest’. Let’s take an example to make it clear, if I invest Rs. 8000/- in a fund, having an interest rate of 12% p.a. (i.e. 1% per month), look at the below table:
|Month||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month)||Closing balance (Rs.)|
From the above table, we can see that the interest per month is not calculated on the SIP amount alone, but on the opening balance as well (which includes the SIP and interest of the previous month). This is how compounding works. So you can just imagine, 10 to 15 years down the line, what the corpus will be.
This table shows, the amounts after 5, 10, 15 and 20 years, with the same amount of the SIP being Rs. 8000/-, @12% p.a. for a term of 20 years:
|After 5 years||6,59,890.9324|
|After 10 years||18,58,712.611|
|After 15 years||40,36,607.996|
|After 20 years||79,93,183.352|
Shocked?? That’s the magic of a SIP of Rs. 8000/-.
To create wealth through SIPs, there is another advantage used, it is called ‘Rupee Cost Averaging.’ This concept is used when the markets are down and advantage can be taken of the situation.
Let us now take a common myth, all investors fear:
Myth: Do not invest when the markets are low, it will cause a loss.
Fact: Invest when markets are down and get more units at a discounted NAV.
Many people believe in this myth and it still prevails today. People fear the fluctuations in the market and keep a watch out, when the market is going to fall, because they do not want to invest at that time. But the fact is, when the markets are down, you get more units at a discounted value. These extra units, will be useful when the market goes up again. This is known as Rupee Cost Averaging.
An example will make the concept clear. If I invest a SIP of Rs 10000/- monthly, and the NAV (Net Asset Value) is Rs. 10, my number of units will be 1000 (10000/10). Now after few months, the NAV drops to Rs. 8/-, my unit will now be 1250 (10000/8). From this we understand, that when the market falls, an investor gets more units at a discounted NAV. So one can just imagine, over the years, how an investor can profit from these SIPs, because at the time of redemption, the market will be high and you will earn more profit on those extra units. This whole process is called Rupee Cost Averaging.
Having said that, this concept is effective only in the case of equity funds, as the rates in the equity market fluctuate from time to time. Whereas debt rates do not fluctuate that much. The Rupee Cost Averaging concept is based only on the constant fluctuations of the market. Hence, the benefit can be availed only if the market is volatile. So for all those investors, who think that they need to keep a close watch on the market, so as to find the right time to invest, can start investing now itself, without having to wait for ‘THE RIGHT TIME’.
These SIPs help in creating wealth to fund your future goals. If they are short term in nature, then it is good to invest in debt funds. But if it’s to fund long term goals, then equity is the right choice. Even if you stop your SIPs, your money will still grow on the amount in your fund. There is a lot of flexibility in investing through SIPs and one of the best investment options.
SIPs are a good option to start investing with, if you are a beginner. You can start with an amount as low as Rs. 500/-. SIPs reduce the burden of having to collect a lump sum first and then invest it. With SIPs, you can invest small amounts every month. You have the flexibility of even increasing your SIP amount. You just need to let your SIPs grow and let the magic of compounding work for you. There’s no right time to invest through SIPs. Now is always the right time.
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.
Considering the current situation, where the market is down owing to COVID-19 pandemic, many of you must be thinking how to identify underperforming mutual funds. Although if you have invested for long term goals, short term volatility should not bother you. But still you should learn to identify underperforming funds and to take corrective action.
Mutual funds have been the most amazing tax saving investment instrument and simultaneously have outperformed conventional saving instruments in long term. However, even if you invest in mutual funds for long term, it is imperative to look at the performance of the funds periodically. But, the question arises, what if any of the funds underperform.
Read More :- Understanding Systematic Transfer Plans (STP)
How to take stock of the mutual fund portfolio?
Investing in the mutual funds is one of the best options to gain the maximum returns for the capital invested in the market. It is a better way to make money. But in order to gain the benefits, the mutual funds investments should be tracked regularly. The performance of the mutual funds has to be seen in the right way. Following are some of the measures :-
- Review the performance of all the mutual funds in your kitty periodically.
- Indicators to be checked for performance of the fund. Few of them are:-
1. AUM (Assets Under Management)
Reduction in size of AUM consistently may indicate underperformance.
2. CAGR (Compounded Annual Growth Rate)
If CAGR is less than benchmark as set by the mutual fund house, then it is not so lucrative to invest in the fund.
3. NAV (Net Asset Value)
NAV is debated to be considered as a performance measure. Since, stock markets fluctuate daily and mutual funds invest in stocks, mutual funds are subject to market momentum gains or losses. However, consistent lowest NAV in a similar fund category would be a red signal.
- You can identify the underperformer based on a combination of performance indicators. The mutual funds which lag in the category and with respect to the benchmark, in such measures, will be most probably the underperformer.
- If you are holding the funds for long like 2 or more than 2 years, and are still experiencing that the fund is not going to turn around the performance, then it’s the time to act.
- Deep analysis of the portfolio of the fund is essential. For e.g. if you are investing in blue chip funds, it is not necessary that your fund invests in large cap only. This fund may invest in large cap as well as mid cap, for a balanced exposure. Mid-cap and small cap stocks are known to be high risk- high reward, so if the market rallies, you will get superior returns, but in case of bear market, the same fund will underperform. In such a case, your investment is secure due to disciplined investment approach, but your fund may underperform a few times when the market goes down, which may not be a matter of concern.
Reasons behind underperformance of the mutual funds
- Fund investment strategy or change in existing investment strategy
If the fund is aggressive then it will fare better in bull market but will underperform in bear market. Similarly, a mutual fund with value investing approach will not be performing better in the bull market.
- Overweight on underperforming sectors or industry
Certain funds are sector specific or may follow and invest in stocks based on theme (like emerging equity or infrastructure industries). Every sector may not perform up to the standard every time.
- Higher expense ratio
The fund may have moderate to high return magnitude but may also result in reduced return due to higher expense ratio. This is because, returns are paid out only after deducting for management fees, administration fees, etc.
- Fund management approach
If there happens to be a change in fund management style or fund manager, which may result in total change in stock selection or even long-short strategy.
There may also be other reasons like merger of the fund with another fund. However, even if you could find out the reason why the fund is underperforming, you must know what to do next since you are already holding the units, so let’s see what you can do now.
What to do when the fund is underperforming?
If you are holding any flagship scheme or core scheme of the fund house, (which is generally promoted by the fund based on its performance), then you may continue holding it for a while. However, keep a look at its alpha (capability to generate returns over and above benchmark returns).
One more notable point is that if the fund manager’s approach is disciplined like value investing, then you may continue to hold the fund, even if it underperforms. Since all funds fluctuate in short and medium term owing to stock market fluctuations, it is not rare that even a sound and stable fund may underperform.
Some of the investors may even buy more units to achieve rupee cost averaging when the funds are underperforming. However, if the fund does not possess the capability to yield better returns in future and the investor buys the units just to reduce the loss, this step may even cause you to incur more loss in coming years.
- Switch or sell
If the fund is underperforming in its category as well as against benchmark, then it’s the time for some action. If the sectoral or thematic underperform due to cyclic changes in the sector, then you may redeem the units and may place the investment in another worthy investment, since thematic or sectoral funds are generally far too dangerous since they owe to seasonal fluctuations.
If the fund’s underperformance is due to some of the factors like merger of the fund or change in fund manager, then you may separate such funds from others in your portfolio and keep close watch for a year or so, to let the hidden potential to come up. However, quarterly reviews are must so that you may come to know whether these funds still underperform and that it is time to get out of those funds.
Lastly, it is suggested that you take assistance from your investment advisor or consultant as they can help you to make best decisions by analysing your portfolio. You may also download the Fintoo app for the same.
How many of you are familiar with STPs?
I’m sure not many of you. Now with so many investment options available, people are confused in what to invest, where to invest and how to invest. Some people do not know what are the investment options available, and how to make the best use of them.
You may have different goals and dreams in life, but to fund those goals is a big task. It is always suggested that if you don’t know your way through the market, you seek help from an advisor. They will be able to guide you in the right path and help you build a bridge between your funds and goals.
You must be aware of Systematic Investment Plan (SIP) which is one good option to invest in mutual funds. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in. Systematic Investment Plans are a disciplined way to start investing to create wealth for the longer period of term.SIPs bring about a good saving habit in one’s routine, which is necessary.
Read More :- Importance of Continuing SIPs Amid COVID-19
Another option is STP (Systematic Transfer Plans), this is good for those investors who do not want to take the risk of investing a lump sum amount in a particular fund at one go. Especially in the current scenario, where the market is volatile due to COVID-19 pandemic, it is suggested to not invest lump sum. So Systematic Transfer Plans comes to your rescue.
Under Systematic Transfer Plans, an investor can invest a lump sum amount in a fund and transfer regular amounts, which are predefined by the investor, to another fund, on a specified date. You can make these transfers on a monthly, quarterly or even weekly basis. This is a better option than directly investing the whole lumpsum amount in a risky fund.
There are 2 types of STPs:
- Fixed STP: Over here, the amount that is to be transferred from one scheme to another is fixed. For example, Mr. A invested Rs. 100000/- in a fund ABC, and he has opted for a STP to fund XYZ, he wants Rs 5000/- to be transferred to fund XYZ on a monthly basis. Here we can see that Rs. 5000/- is the fixed amount that is to be transferred.
- Capital appreciation STP: Under this, the amount that is to be transferred will depend on the profit earned. This means that the investors want only the profit amount to be transferred to the other fund. Let us take the same above example to get a better idea, If after investing Rs. 1 lakh in fund ABC, he gains Rs. 6000/- (after a few months or a year) on it, the same amount of 6000 will be transferred to fund XYZ.
Now lets see how STP is relevant to you.
If an investor, who has a lump sum amount to invest, doesn’t want direct exposure in the equity market, can invest his lumpsum amount in a debt fund and through STP, transfer the amount he wishes to in the equity fund.
He can make the transfers monthly, quarterly or even weekly, as he wishes. However, one must keep in mind that, whenever an amount is transferred from one fund to the other, the units of that fund, from which money is going out, becomes less and units of the fund where the money is transferred increases.
Lets say, if the funds are being transferred from debt to equity, then the units in the debt fund will reduce and the units in the equity fund will increase.
Read More :- Understanding SIP, SWP and STP
STPs from debt to equities are more effective, when markets are volatile, and an investor does not want to take a risk. STPs are a better option than one time investments, in cases when the market is down which we are experiencing right now because of global pandemic. However, if we look at it the other way round, then one time investments would be a better option, if the markets are moving upwards. Having said all this, it is very difficult to predict the market scenario for a retail investor. So it is better for them to invest through STPs and get better risk adjusted returns, over a period of time.
STPs help investors reduce their risk, if the regular transfers are maintained. Just like how the concept of Rupee Cost Averaging works for a SIP, it can be applicable to a STP also. People usually think that when the market is down, they should redeem their money, before they make a bigger loss. However, people investing through SIPs, can avail this benefit.
Let us continue with earlier example to understand above point:
Mr. A invested Rs. 100000/- in a fund ABC, and he has opted for a STP to fund XYZ, he wants Rs 5000/- to be transferred to fund XYZ on a monthly basis. Now let us say in the 1st month, the NAV of fund XYZ was Rs. 10/-. So the no. units added will be 500 (5000/10). After a few months, if the NAV drops to Rs. 8/-, 625 (5000/8) more units will be added to the XYZ fund compared to 500 earlier.
In this example, you can see how an investor can take the advantage of the market when it drops. This example is taken also with a few months gap. Now, imagine if an investor keeps his money for years, how much will he gain.
STP is a tool to reduce risk, like SIP. The transfers should be made in a disciplined manner to avail this benefit. Well now you’ve understood all you need to know about STPs, so you can start planning for your investments, and make use of the funds you have in a proper and ‘Systematic’ way even during the current volatile market owing to COVID-19.
Current financial situation of almost all the households is suffering owing to COVID-19 pandemic. The reason being layoffs, salary cut, fewer employment opportunities, business going into losses because of low consumption. Amid all this, students’ education is also at stand still as regular classes could not be conducted with the country under lockdown.
As the lockdown has been extended for the third time in a row to stop the spread of coronavirus, technology is coming to rescue with the online classes.
Even if you are trying to manage the current scenario by forcing your kids to attend online classes organized by schools and other educational institutions, at the back of your mind, you would still be worried about your child’s higher education.
You are not alone. Most of the parents are worried about their children’s current education and also how the situation will turn into their child’s future as this pandemic is going to be with us for some time.
No need to worry about your child’s higher education, if it is a long term goal which is at least 5 years away. Early savings can do wonders. In this blog, we will talk about an amazing investment option called SIP.
Many of you might have heard of the investment tool SIP i.e. Systematic Investment Plan. It is one of the best investment tools for a person who wants to save to reach a specific goal or even for a beginner. It’s the power of compounding in a SIP, that allows the person to reach their goal at the specified time. Though the power of compounding can work it’s magic only, if the SIP is invested over a longer period of time.
Education has become very expensive, especially if you want to send your child abroad. To do a post graduation, you will not find any college that charges less than few lakhs, yes it is a big amount. We know that the prices are rising, and you can just take an estimate that Rs. 15 lakhs for a post graduation today, will be how much 10 to 15 years down the line?
Must Read: Everything you Need To Know About Debt Funds
It comes up to almost Rs 30 lakhs to Rs. 40 lakhs if we consider inflation at 5% to 7% for 15 years. Whenever you plan for any goal, in this case education, always consider the future value of the cost today. So that you know how much you need to invest to reach that goal and of course in how many years you will require it.
The power of compounding is the most simple words is when you earn ‘interest on interest’. Let me just give you a glimpse of what it means. The below table will help you understand it better:
|MONTHS||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month)||Closing balance (Rs.)|
|1||0||6000||60 (6000 x 1%)||6060|
|2||6060||6000||120.6 (12060 x 1%)||12180.6|
|3||12180.6||6000||181.806 (18180.6 x 1%)||18362.406|
As you can see in the above table, in the 2nd month, the interest is calculated on the previous month’s interest and SIP, as well as the new SIP. That is how the Power of compounding works.
Let’s say, Mr. Shetty wants to send his child to the US for his post graduation, when his son is 21 years. His son is currently 6 years old. He wants to start early planning because he knows the prices are only going to hike. He has considered the future value to be Rs. 50 lakhs. He also has Rs. 12000/- to spare every month as SIP in an equity fund, giving an average of 11%. Let us see if the monthly SIP can match his goal amount.
|FUND||SIP AMOUNT (RS.)||RATE OF RETURN||NO. OF YEARS||APPROX.FUTURE VALUE (RS.)|
As you can see in the above table, he reached his goal and has some extra amount too. So the earlier you start, the better for you.
Now SIP in equity funds, can fetch higher returns than SIPs in debt funds. An equity market is volatile as you witness it currently and this is the major reason why it is a risky investment. Investors also search for the right time to invest in the equity market. When in reality, there’s no right time to invest in the market. What many investors don’t know is that you can benefit from the market when it is down too. How?
Well, this process is called Rupee Cost Averaging, this means you get more units at a discounted value. In a layman’s language it means, taking advantage of the market downfall, not literally but, just to understand what it’s about.
Example, If Mr. A, started a monthly SIP of Rs, 12000/-, check the below table to understand it better.
|MONTH||SIP (RS.)||NET ASSET VALUE (NAV)||UNITS (SIP/NAV)|
In the above table, you can see that lower the NAV, the more units you get. So when the market is high, you will profit only, as you will have more units. So you see there’s no right time to invest in the market.
If you already have some SIPs which are going on, it is strongly recommended that you don’t stop these SIPs looking at current fall in the equity markets owing majorly to global pandemic. Now you have understood that your SIPs will be advantageous in the long term and the reason being rupee cost averaging. So don’t stop your current SIPs and also you may start with new SIPs to have adequate corpus accumulated for children’s higher education.
All parents would want to give their children the best in life. Some may know how, some may not. But this can give you a head start. Everything is right in front of you, all you need to do is take that first step to provide a bright future for your child.
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