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SIP Investment

“SIP of Rs 5000/ – started on 1st July 2010, has become Rs 18.84 lacs as on 1st July 2021 (Actual Figure)”

What is SIP?

SIP is a short form for Systematic Investment Plan, As the name suggests, it is a method of regular investments. Like when u invest a Fixed amount every month in a Mutual Fund Scheme, it is called a SIP.

Where to Invest SIP?

It is advised to start the SIP in a Diversified Equity Fund, for better long-term growth. Systematic Investment Plan works on the principle of SNOWBALL theory – the longer you go, the bigger it grows. Volatility is the food for Investing.

How to open a SIP Account?

Opening a Systematic Investment Plan account is very simple. You just need to check if you are a KYC compliant, and then sign an ACH mandate with your MF Distributors, for monthly deduction of the SIP amount; that’s it!

3 TIPS TO GET THE BEST FROM YOUR SIP

SIP TIPS

Systematic Investment Plan is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time. Currently, mutual funds have 3.73 crore SIP accounts through which investors regularly invest in Indian mutual fund schemes.

1st TIP TO GET THE BEST FROM YOUR INVESTMENT

SIP is nothing but a piggy bank! You should assign all your SIP to your Financial Goals, like home painting, Foreign Vacation, Social Gifting,  for Kids education etc. This will help you maintain the discipline of investments and inspire you to save.

2nd TIP TO GET THE BEST FROM YOUR INVESTMENT

Always check your estimated future Value, before starting a Systematic Investment Plan; I have given below the reference table of Rs 1000/- per month at an assumed rate of 12% p.a*, just for your help.

Tabular Table SIP

*Note: Above the table is just a ready reference for your help. 12% p.a is just an indicative return, taken for the purpose of calculation. The actual Average ROI of Top 5 Diversified Equity funds is 18.5% p.a, in 20 Years period.

3rd TIP TO GET THE BEST FROM YOUR INVESTMENT

Always allocate your Systematic Investment Plan according to your target period and Liquidity requirement. Like, if you want to start a SIP for a shorter period (< 5 years), they prefer a large Cap or Hybrid Fund, and if you are looking to start investing for a longer period (7-10 years or more), you can select Midcap or Small-Cap Funds. I have given below the real historic chart of some of the long-term SIPs in Indian Equity Mutual Funds:

One can see the advantage of investing over the long term – An investment of Rs 5000 per month has been converted to huge wealth if you have kept the discipline of investing.

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2020 has been an extraordinary year. The onset of COVID-19, consequent lockdown, payroll cuts, retrenchments, and bankruptcy of companies like JC Penney, Hertz etc has been the new normal and guess what, the year is not over yet!

Financial markets have been on a roller coaster ride. A steep slide in March followed by fiscal stimulus / liquidity measures and the strong pull back in financial markets. Among all this mayhem, gold has become the new darling of investors outperforming all asset classes over the last three years delivering compounded return of over 16%.

Other than doomsayers, it has taken all the analysts by surprise.

So, what is fueling the rally in gold? I have tried to enumerate some of the key drivers of the rally which should provide some color to the future outlook of the asset class as an investment proposition –     

  • Gold is traditionally considered as a hedge against inflation and a safe haven for investors in times of uncertainty. Gold has a negative correlation with REAL interest rates in US. REAL Interest rate refers to the difference between US Treasury yields and inflation. Gold as an asset class gains when interest income does not compensate for the loss of purchasing power due to inflation. When the REAL interest rates fall, gold goes up in value and vice versa. Below is a chart of REAL interest rates and gold prices over the last 40 years.
Gowth Graph of Gold Price Rate
Graph showing inverse relationship between Real interest rates (red line) and Gold prices (yellow line)

Central banks have been on a spree of money printing in the aftermath of COVID-19 to provide liquidity to businesses to survive the downturn. Fed Bank alone has printed 3 trillion US Dollars in the aftermath of Corona. Interest rates have been maintained near zero to provide relief to businesses to enable them to raise money to tide over shrinking cash flows / service existing loans. Low interest rates also provide relief to Central banks to service sovereign debt which has ballooned due to fiscal stimulus.

Injection of money in the economy coupled with supply chain disruptions due to lockdown have raised inflationary expectations. US Treasury yields are at historic lows pushing REAL Interest rates below zero sparking a rally in gold.

  • Goldman Sachs in its report released in July ‘20 has warned that the U.S. dollar may lose its status as the world’s reserve currency. To quote from the report of Goldman Sachs “The resulting expanded balance sheets and vast money creation spurs debasement fears. a greater likelihood that at some time in the future, after economic activity has normalized, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden.”  With US Treasury yields falling to all-time lows, fear of loss of faith in Greenback, Central banks may look at gold as the favoured asset class to diversify their holdings.
  • Monetary and fiscal stimulus by Central banks helped in avoiding another Lehman brothers and a repeat of 2008. It implies that there is more money chasing financial assets than ever before. With world economy shrinking in the aftermath of lockdown, debt yields falling to all-time lows, there exists incentive to shift allocation in favour of gold. Geo-political challenges, pandemic and intensifying trade war strengthens the choice of gold as an asset class.

Future outlook in the rally in gold

While the above arguments sound convincing than ever before, we need to closely look at some more data points to see whether rally in gold is sustainable.

Gold does not generate cash flows and has minimal utility as an asset class except towards jewellery. Therefore, traditional models of estimating the fair value of the asset by estimating / discounting cash flows do not work in case of gold.

There is a traditional belief that gold does not fall in value. If we go back into history, gold made a high of $1800 in 2011 only to fall below $1100 levels in 2015. So, gold DOES fall in value and the fall could be steeper than we might think.

Gold Pieces
Investing in gold without understanding other economic indicators could be gamble

There does exist a distinct risk that dollar may lose its status as the world’s reserve currency. Money printing by US Fed, debt at 107% of GDP and the world’s largest trade deficit at USD 616 billion, could be the harbinger of a fresh world order. While the collapse of US dollar and the rise of alternative currencies may be inevitable, there is nothing to indicate that we are about to breach the tipping point for it to be imminent. There goes a saying that markets may remain irrational much longer than we can remain solvent. For all we know, US dollar may continue to hold fort as the reserve currency in the absence of alternatives for few more cycles of rise and fall in gold prices. 

Let us look at some data points on the real demand for gold in Q2, 2020. Consumer demand for gold jewellery fell by 53% in Q2, 2020 due to lockdown and buying by Central banks fell by 50%. So, what is driving the spike in gold prices? Investment demand for gold increased by 98%. Rally in gold prices is therefore due to Investment demand which is feeding upon itself and is reminiscent of the tech bubble of 2000 before its collapse. 

Most investment houses & analysts are bullish on gold today. But were they bullish on the yellow metal when it began its upward trajectory in the last quarter of 2015? Unfortunately, the answer to this question is NO. These voices tend to follow not predate the rally in an asset class and become louder when the asset class gets nearer to peak ( highest point in prices) than trough (lowest point). And then they pick another asset class citing it to be the next wealth creator and then another.

Today skepticism runs high over investment in equities while there is herd buying happening for gold. It normally pays to play contrarian in markets and resisting doing what is common sense.