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How SIP works for investors in any life stage

Sep 28, 2021 / Dwaipayan Bose | 62 Downloaded | 5501 Viewed | |
How SIP works for investors in any life stage }
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What is Systematic Investment Plan?

Systematic Investment Plan (SIP) is a facility offered by mutual funds, wherein you can invest a fixed amount at regular intervals in a mutual fund scheme of your choice. Through a one-time bank ECS mandate, a fixed amount will get debited from your savings bank account at regular intervals (e.g. weekly, fortnightly, monthly) as specified by you and get invested in a mutual fund scheme chosen by you. There is no penalty if there is insufficient balance in your bank account; your SIP instalment will not simply go through.

Benefits of SIP

  • You do not need to accumulate a large amount to invest in mutual funds. Through SIPs, you can start investing in mutual fund schemes with a small investment amount.

  • Through SIPs you can invest from your regular monthly savings in a disciplined way. Savings not invested will yield low returns or can get spent in some wasteful expenditure.

  • Through SIPs you start investing early in your working career. You can start your SIP with an investment amount as low as Rs 500 only. The longer you remain invested, the higher is your wealth creation potential due to the power of compounding.

  • With SIPs there is no need to time the market, i.e. invest according to market levels (high market or low market). Through SIPs, you will be buying at different market levels, both low and high. For long term investments, the compounding effect is a much more important attribution factor than the price at which you invested.

  • SIPs can help investors take advantage of market volatility through Rupee cost averaging of purchase price. In bear markets Rupee cost averaging, will bring down the average acquisition cost of units and may enhance your returns in the long term.

  • If you are committing a large amount upfront, you may be more emotionally involved with your investments and make emotional investment decisions based on market conditions. This can harm your interests in the longer term. Systematic investment keeps you disciplined and prevents you from making spur of the moment decisions. Discipline is a very important factor in long term success in your financial goals.

SIPs work for different life-stages

  • Early Career Stage: This stage covers the first 7 to 10 years of your career. If you are in this stage of life, you may not be clear about your long term financial goals. However, it is not too early to start investing. As mentioned before, the earlier you start investing, greater will be your wealth creation due to the power of compounding. Starting your SIP at this stage will also make you more financially responsible, something that will stand you in good stead later in life. To quote the legendary investor Warren Buffett, “Do not save what is left after spending; instead spend what is left after saving.” This may be the best personal advice for young investors.

  • Career building stage: This stage covers the period from your early 30s to 50 years of age. At this stage of your life, you are likely to be married and also may have children. Once your children start going to school, you may start thinking about their higher education and career aspiration. Children’s higher education is one of the most important life-stage goals for most investors. Higher education expenses are increasing at a much faster rate than the average inflation rate. Therefore, you must start planning for your children’s higher education from an early stage of their lives. The longer you invest through SIPs you can accumulate more funds for children’s education through the power of compounding of mutual fund SIPs.

    Along with higher education, children’s marriage is also an important milestone for most Indian parents. In order to have the grand wedding for your child, you should start saving and investing when your child is young. You can start planning your children’s wedding through SIPs. Since it is customary and auspicious to gift gold to the newlywed couple, you can start planning for it by investing in gold mutual funds through SIP.

    At this stage of life retirement seems far away, but with every passing year retirement will get closer. With increased longevity, retired lives are getting longer. You need to have a sufficiently large retirement corpus to ensure that you are able to maintain financial independence after retirement. Mutual fund SIP is an ideal retirement planning solution since you can start planning for retirement over long investment tenures and benefit from the power of compounding.

  • Pre-retirement stage: This covers the period from your early 50s till retirement. Though you should start retirement planning from an earlier stage of life, your primary focus in this stage of life, should be on retirement planning. Since your income is highest at this stage of your career and you are hopefully debt-free, you can save a larger amount for retirement planning through SIPs. If you want to leave an estate for your loved ones, you can also invest for wealth creation in your estate through SIPs.

Home purchase

Buying your own home is one of the most cherished goals of most Indian households. Even if you are an existing homeowner, you may wish to buy another house for rental income, vacation stay or for a close relative. Home purchase requires considerable capital outlay, even if you are financing your home purchase through home loans. Careful planning and disciplined investing through mutual fund SIPs can help you accumulate the corpus required to purchase your dream home.

Health emergencies

Investors must always have an exigency plan for health emergencies. With rising cost of healthcare, a serious illness or accident can cause financial distress. In addition to hospitalization and post hospitalization expenses, some of which may not be covered by your health insurance policy, an illness or accident entailing treatment and recovery over a long period of time, can cause you to be without pay, if the recovery period exceeds the number of sick leave days given by your company. Through SIPs you can build an emergency fund which can come into use in case of an unfortunate health crisis. In planning such an emergency fund, it will be prudent to consider a situation where you are unable to work for a prolonged period of time and invest accordingly.

Things to keep in mind for SIPs

  • Your SIPs should be linked to your financial goals. Financial advisors suggest separate investments for different financial goals, so that you can track progress towards your goals

  • You should always invest according to your risk appetite and select schemes accordingly

  • You should have long investment tenures for your SIPs. Longer the investment tenure, higher is the wealth creation potential.

  • You should be disciplined in your SIPs. Do not stop your SIPs in reaction to market movements.

  • As your income and savings increase, you should also increase your SIPs. You can use the SIP top-up facility to increase your SIP instalments in line with increase in your income.

You should consult with your financial advisor, if you need any help with investments.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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