Now that we’ve discovered the power of Systematic Investment Plans (SIPs) and their benefits, it’s time to take the next step. Don’t worry; it’s a straightforward process.
- Set Clear Financial Goals: Before diving into SIPs, it’s crucial to define the financial objectives. There are two things that must be defined, the corpus size and the time available to build that corpus.
- Assess Where To Invest: Experts also call it assessing one’s risk tolerance. This step is also straightforward and it is linked to our investment horizon. If the time is less than 3 years, one must invest in debt mutual funds. If the time is less than 5 years, hybrid funds are suitable. For a time horizon above 5 years, pure equity funds (or even direct stocks) are best.
- Choose the Right SIP: Choosing a mutual fund scheme that aligns with our goals is essential. One of the better ways to do it is to use a mutual fund screener. The Stock Engine has a mutual fund screener, it comes bundled up as free with it. Once you have picked a suitable scheme, you will know approximately what returns you can expect in the future.
- Determine the Investment Amount: Use the investment calculator provided in this article to determine how much you should invest each month (SIPs) to reach the goal.
All mutual funds have two plans, regular and direct. A direct plan always yields higher returns than a regular plan. Why? Because the total expense ratio of a direct plan is lower than a regular plan. Generally speaking, a direct plan will yield a 1% higher return than its regular sibling. Over a long SIP period, like 10 years, this 1% extra return can make a big difference.
For example, investing Rs.2,250 each month at 17% per annum for 35 years will build a corpus of Rs.5.91 Crore (equivalent to today’s Rs.76 Lakhs). Similarly, investing Rs.2,250 each month at 18% per annum for 35 years will build a corpus of Rs.7.89 Crore (equivalent to today’s Rs.1.0 Crore). So you can see, that a minor 1% differential in return substantially affects the final corpus.
Now the question is, how to invest in direct plans? The best way is to open the website of the mutual fund company (like ICICI Pru, HDFC Securities, Axis Mutual Funs, etc.) and apply there. You can also use apps like Kuvera to easily invest in direct plans.
Real-life stories have the power to inspire and demonstrate that wealth creation through Systematic Investment Plans (SIPs) is not only blah-blah but an achievable reality.
Let’s meet a few individuals who started with limited savings and witnessed their financial dreams come true through the magic of SIPs:
Rajesh, a young professional, had always dreamt of taking his family on an exotic vacation. He decided to start a SIP for the next 3-year period in a debt mutual fund. Over the years, his SIP investments have grown consistently. As SIPs are executed on autopilot, at the end of the period Rajesh was astonished to see the accumulated corpus. Rajesh’s story is a testament to how SIPs can turn aspirations into reality, one step at a time.
Mita was worried about her child’s future education expenses. With limited savings, she felt overwhelmed by the thought of covering the cost of higher education. Mita began a SIP specifically for her child’s education. As she diligently contributed for 12 years, a sum of Rs.5000 each month in a multi-cap mutual fund (16% p.a.). When the time came for her child to pursue higher studies, Mita was relieved that she had more than Rs.20 Lakhs in her SIP account.
Ankit, in his early 30s, had always dreamt of retiring early to pursue his passions. However, he believed he needed a massive lump sum to achieve this dream. Ankit started a SIP with a portion of his monthly income (Rs.25,000) and stayed committed to his long-term goal (20 years). As his time horizon was long, he decided to risk investing in a quality small-cap mutual fund (17% p.a.). To his surprise, by the time he was in his early 50s, Ankit had amassed Rs.5.5 Crores (equivalent to today’s Rs1.7 crore). This was just enough for his early retirement.
Excuses often stand as formidable roadblocks on the path to financial prosperity. However, understanding and addressing these common excuses can help us overcome them. For all of us who feel that investing is not easy, SIP is the answer to most of our excuses.
Delaying your investment journey until you earn more is a missed opportunity. By starting early, we can take advantage of the magic of compounding in the later years. Waiting until you earn more may cost you valuable years of potential wealth accumulation. So, even if one’s income is less, it is wiser to at least start a SIP of Rs.500 per month and let it compound for decades.
Investing can seem complex, but SIPs in mutual funds can simplify the process. When we invest in SIPs, we are essentially delegating the investment decisions to the fund managers of the mutual funds. All you need to do is select a suitable mutual fund scheme that aligns with your goals and risk tolerance. It’s an excellent way for beginners to participate especially in the stock market.
Market volatility can be intimidating, but SIPs are designed to mitigate this risk. Suppose you are in your early 20s and have little idea of equity. Should you avoid equity and start your investments with insurance or bank deposits? I think a better start would be to start a SIP in index funds. To know more about index investing; read this article.
Building emergency savings is essential. While saving is essential, delaying the start of a SIP in a suitable equity-linked plan is also a necessity. Even a 2-3 years delay can substantially hinder the possibility of us reaching our financial goals. I think, when the convenience of SIP is there, we shall not delay our equity exposure even by one month. Start today.
In the journey towards financial empowerment, small savers often find themselves wrestling with doubts, hesitations, and perceived limitations. However, we stand at the cusp of transformation, where small savers are no longer bound by the confines of their initial savings. Systematic Investment Plans (SIPs) emerge as the torchbearers of financial hope and empowerment.
SIPs shatter the misconception that substantial savings are a prerequisite for investing. They offer a disciplined, strategic, and long-term approach that not only mitigates risk but also leverages the power of time and compounding.
Remember that it’s not the size of your initial savings that matters but the commitment to your financial goals. SIPs are the vehicle that transforms determination into prosperity.
The power to unlock wealth and secure a brighter financial future is within your grasp.
Have a happy investing.
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