Mutual Fund SIPs - Ideal to reach our financial targets

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We get our income every month. Therefore, it becomes convenient to save every month. By investing our savings on a regular basis without letting it sit idle, we can give ourselves the opportunity to earn for the longest period. Also, the longer our money stays invested, the greater the power of compounding that works for us.

These two aspects, a regular and disciplined investment approach with time on its side, make systematic investment plans (SIPs) ideal vehicles to reach one's financial goals.

For example, you start a monthly SIP of Rs 10,000. Let's assume two scenarios of annual growth rates between 8% and 15%. If you start early, after a 30-year period, your corpus would be between Rs 1.5 crore and Rs 7 crore. However, the same plan over a five-year period would give you between Rs 7.4 lakh and close to Rs 9 lakh (see Start early to save more).

Investing systematically every month also gives us another important benefit: How often have you seen 'unexpected' expenses taking away your savings? If, instead, your money is invested, it will not be available for spending.

One can start an SIP in an equity and/or gold fund (for higher annual returns of around 15%) for long-term goals or in a debt/liquid fund (for safer annual returns of around 8%) for short- to medium term goals.

SIP in a volatile asset class like equity/gold also allows you to benefit from 'Rupee Cost Averaging' wherein a fixed contribution per month fetches you more units at lower NAVs and lesser units at higher NAVs, thereby reducing your overall average cost of acquisition.

While starting an SIP in an equity fund, it is essential to ensure that the scheme has a proven track record of outperforming the broader markets.

SIP is essentially a mode of investing in which the returns depend on the quality of the underlying scheme. For instance, if you had a monthly SIP of Rs 10,000 on the 1st of every month for a consistently performing equity fund launched about seven years ago, and had invested an equal amount in the BSE sensex around the same time, the results would hugely differ

SIP in a debt/liquid fund, if properly planned, can deliver tax-free returns and can also be used by individuals and businesses for short term goals like payment of taxes, vacations, annual bonuses, loan repayments, school-college fee, asset acquisitions, etc.

Before starting an SIP, you must consult a qualified financial planner for risk profiling, an assessment of your needs, preparation of the financial plan and to obtain advice on the suitability of schemes to start SIPs.

 

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