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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.

Check more articles like this.

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How much should I save for my retirement and when should I retire?

These two questions are like uninvited relatives. One cannot chase them out but at the same time got to treat them special.

Americans love numbers to the extent that they measure everything with a pinch of stats (cups of coffee consumed or the number of honks, in key F, their gas-guzzling cars have blared – I am not sure what is the use of the latter one). No other country loves numbers like America. Every part of their life, however trivial it could be, is bombarded with statistics. In my opinion, most of the stats (commercial ones) are influenced by marketers to increase market share, destroy competition, and ultimately drive “unlimited profits” to the shareholders!

I will talk about these mind-blowing trivial statistics and how convoluted logic is used to pursue one’s agenda – in another article.

Right now – another thumb rule is on your way. And that is “4% Rule”!

What is the 4% Rule?

The retirement pool or fund is no exception to the whirlpool of stats. Amongst them, the “4% rule” is probably the simplest. This rule answers the fundamental question of what should be the size of your investment portfolio when you retire? The rule helps you plan for a corpus that would enable you to enjoy the current lifestyle till your last breath. Generally, one lowers his/her standard of living after retirement. If you plan well in advance and accumulate enough corpus, maintaining your current standard of living should not be an issue.

Then let’s delve into the mechanics of it.

First step is to define your current & retirement lifestyle.

Second step is estimating your yearly expenses to maintain your current lifestyle and then make adjustments to reflect changes in your post-retirement lifestyle.

Third step is estimating your retirement age and arrive at the “corpus” amount.

Define Your current & retirement lifestyle.

This should be your retirement corpus when you retire. You must invest this sum – say 50% in equity and 50% in bonds. Collectively it can give an average of 7% yearly returns.

Let us say you retire at the of 60 and this corpus will take you through for another 25 to 30 years. You can start withdrawing 11 lacs from the corpus in the first year.

How Inflation affects Retirement Corpus?

You might ask what about inflation? That’s a very important aspect that can jeopardize any financial plan. The 4% rule is built in such a way that you can withdraw enough money to maintain the same lifestyle despite inflation, say 3 to 4%. So, you can withdraw in the second year an amount of (11 lacs + 33K for inflation) and third-year withdrawal will be 11.67 lacs and so on.

Caveats

    • This is just a thumb rule – consult your financial advisor for detailed advice.
    • This corpus is only to maintain regular expenses. Any extraordinary major expenses like college admission, children’s wedding is not covered. One should create separate funds for them.
    • Financial discipline is paramount – DO NOT withdraw big chunks from the corpus. This will affect future earnings and might lead to financial distress.
    • Not applicable in hyperinflationary economies like Venezuela.
    • Pension is not considered

Although there have been several studies to indicate 4% rule sufficiently takes care of ups and downs in the economy. However, for many skeptical and conservative investors like me 4% rule might not be good enough. I personally would go for the 3% rule. That means I will start my retirement with a corpus of around 3.67 crores instead of 2.75 crores. Arriving at the corpus amount is just a start – one needs to carefully manage his investment portfolio by reviewing periodically and suitably adjusting/reallocating assets as and when required.

Do let me know your thoughts in the comment section.

Read also: Double your Money

Retirement Planning is one of the most important and expensive financial goal. An individual can get loans for other financial goals like buying a car, house, kids’ education etc. but he cannot avail any loan for meeting any shortage during his retirement.

I have come across many individuals who had decent earnings during their working years and they did pretty well when it came to saving and investment, however as they approached retirement they had very little retirement corpus and they ended up compromising on  their life style post retirement planning or became financial dependent on kids

Let us understand why an individual generally falls short of his/her retirement goals and the realization happens when he/she is on the verge of retirement.

Let me tell you a story of one Mr. Kumar and his retirement planning or his non-existence of it; He had a happy family with two kids. He had a good earning; he saved and invested his money in a diligent manner. He bought a car and a house by taking loan and dipping into his investments. Then he had an EMI to pay ; any excess savings he could manage on a monthly basis was used prepay the loan. This routine was followed closed to a decade and debt reached a manageable size. Meantime, the next challenge surfaced – carrying a huge price tag – children’s higher education. So Mr. Kumar again dipped into his savings and funded the education. Every Indian parent’s responsibility will not end with funding the education of their kids. A decent wedding is a must and not an option in most cases. Mr. Kumar, the hamster, got back on the wheel and started saving for their marriage and got them married. Mr. Kumar’s clock was ticking with equal speed – he reached a ripe old age, in terms of work life, of 56 years. Now he was barely left with 4 years more of productive work life, during which he has to make enough savings which can support his retirement life of 15-20 Years, which was as impractical a goal as they came. Many of us can relate to the situation of Mr Kumar.

College education can be very expensive

What went wrong in the way Mr. Kumar handled money? Lets analyse a bit;

He was myopic ; He was focusing on his next set of short term goals which came at the cost of long term retirement goals. So many individuals get into this trap, where they try to achieve the next nearest financial goal with all the available financial resources. They feel very comfortable as they keep achieving the goals on hand and finally when they are close to retirement date, they realize they are totally off track from the biggest and most expensive goal of their life.

The realization of not having enough savings and investments came very late. At the end he was left with not so very desirable options :

  • Postpone the retirement date for few more years.
  • Compromise on the life style post retirement
  • Depend on their children for financial support

Mr. Kumar, had he penned down all his financial goals and invested accordingly since initial days, the probability of achieving all of them would have been high. The key factor is having a goal in place and then investing to achieve it – it’s called Goal Based Investing.

Benefits of Goal Based Investing in Retirement Planning

  • Investing with a clear focus on the financial goals (children’s education,marriage, medical emergencies & retirement planning) helps to achieve them in an effective manner.
  • Helps you select suitable Investment Asset Class (Equity, Bonds, Real Estate, Gold) based on the time horizon and nature of goals.
  • Increases awareness on underfunded goals and unfunded goals : This visibility helps an individual to take effective action in bridging the gap during his working years.
  • Even if a goal is not funded, individual will have realistic expectations.

Keep visiting this section – we will continue to post articles to help you plan for your financial goals. If you want us to cover any area specifically, do leave a comment below. Our experts will be happy to cover them in the next articles.

Key Takeaways

Chart out all your financial goals with clear timelines

Create an effective financial plan for achieving the same.

Remember – Investing without goals is like travelling without destination.