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Systematic Investment Planning

Most person do Investment, But what a majority of them hesitate at is investing.

What Loan?

There are good and bad loans. Good loans are used to build assets such as a house. Bad loans don’t create assets and are used to buy home theatre, PDA, etc. Debt service ratio (monthly loan payment as percentage of monthly take-home income) indicates your repayment ability without stretching your resources

Home loan:
can invest up to 40-45% of your income

Auto/personal loan: should not be more than 20-25% of income

Credit card repayment: no more than10-15% of income

Total debt servicing not more than 40-45% of pay

Also Read : Why To Avail Home Loan?

Retirement Planning Now?

Plans to holiday and travel after an active career needs to be well funded. Power of compounding helps you amass a huge retirement corpus; the earlier to start, the bigger it gets. A secure, comfortable retirement is every worker’s dream. And now because we’re living longer, healthier lives, we can expect to spend more time in retirement than our parents and grandparents did.

Achieving the dream of a secure, comfortable retirement is much easier when you plan your finances.

Also Read : Jump start for your retirement planning early.

Buying Stocks?

Stock are high-risk and high-return investment. There are options like IPOs (initial public offer), mutual funds and direct equity start safe with a mutual fund;

As a beginner you can start with a SIP (systematic investment plan) and then look at other investing options

Bonds and deposits are fixed return in nature, best avoidable for those under 30

SIPs into any well-performing fund scheme is a good way to safe and disciplined stock investing

Also Read :Is Mutual Fund Safe?

 

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Equity fund investment are the investment which are made in made in stocks or equity. Skeptical about equity funds? It is actually the most beneficial and opportune way for a retail investor to get an exposure to stocks. If you are unsure as to how mutual funds are advantageous.

1) A convenient way to participate in the India growth

Story Benjamin Graham, also known as the father of value investing, had remarked that making money depends on the “amount of intelligent effort the investor is willing and able to bring to bear on his task”. He was referring to stock analysis. According to him, an intelligent investor is an individual who has the time, energy and capability to conduct his or her own investment research. Not many would fall into this category of intelligent investors. Even if one does possess the skills, capability and knowledge to manage their own investments, the issue of time is a valid one

2) Fire proofs savings against inflation

According to data released by the Statistics Ministry in New Delhi, the Consumer Price Index, or CPI, rose 7.31% in June and 8.28% in May. No one has to spell it out that inflation corrodes your savings. For instance, an investment in fixed deposits assures you of a definitive return, currently the 1-year return on a bank fixed deposit is between 8-9%. Take tax and inflation into account, and your investment would have defeated its purpose. Equity is one asset class that manages to outperform inflation over time. And, believe it or not, it does have a tax break. The tax on long-term capital gains is zero, which means you pay no tax on the return you earn from your investments if you hold it for at least a year.

3) High potential of returns

Despite the risk of loss, Equity Linked Savings Scheme also has high return potentials. In a long term, the investment in shares might give high returns. In the last 20-25 years, Equity Linked Savings Scheme has given high returns to investors.

4) Investment with SIP is possible

SIP is the most suitable for Equity Linked Savings Scheme as it assures the required investment amount for tax saving. SIP does not always give the desired results but reduces the risk factor. Equity funds have widespread diversification, with very small initial investment. This means buying stocks of different companies at different times in different economic sectors. This is helpful in ways that if a stock drops at the exchange the other stocks can make up for the loss.

5) Liquidity

To redeem your investments, you will have to fill up a redemption form. If you submit it before 3pm, the NAV of that working day is applicable. Post that time, the units will be redeemed at the NAV of the next working day. Once the redemption request is successfully received and verified, it takes anywhere from 2 to 4 working days for the proceeds to be credited to the registered bank account

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Many just think of surplus available with them for investment. But sadly forget to identify the financial goals, time horizon, asset allocation and finally the right funds.
Hence, before jumping into “How should I start investing in Mutual Funds?”, I want to make sure that you must know few basics of investment (including Mutual Funds).

I am not saying that Mutual Funds are BEST or WORST. At the same time other products also. Each product or asset will come with it’s own positives and negatives and also risks. Hence, it is YOU who must understand your RISK.

Below are few inputs from my end.

You must have a proper Financial Goal

I noticed that many of investors simply invest in mutual funds just they have some surplus money.

The second reason may be someone guided that mutual funds are best in long run compared to Bank FDs, PPF, RDs, or even LIC endowment product.

If you have clarity like why you are investing, when you need money and how much you need money at that time, then you will get the better clarity in selecting the product. Hence, first identify your financial goals.

You must know the current cost of that particular goal. Along with that, you must also know the inflation rate associated with that particular goal. Remember that each financial goal to have it’s own inflation rate. For example, education or marriage cost of your kid’s is different inflation that the inflation rate of household expenses.

By identifying the current cost, time horizon and inflation rate of that particular goal, you can easily find out the future cost of that goal. This future cost of the goal is your target amount.

Asset Allocation is MUST

Next step is to identify the asset allocation. Whether it is short term goal or long term goal, the proper asset allocation between debt and equity is a must. I personally prefer the below asset allocation.

Remember that it may differ from individual to individual. However, the basic idea of asset allocation is to protect your money and smoothly sail to reach the financial goals.

If the goal is below 5 years-Don’t touch equity product. Use the debt products of your choice like FDs, RDs or Debt Funds.

If the goal is 5 years to 10 years-Allocate debt:equity in the ratio of 40:60.

If the goal is more than 10 years-Allocate debt:equity in the ratio of 30:70.

While choosing debt product, make sure that the maturity period of the product must match your financial goals. For example, PPF is best debt product. However, it must match your financial goals. If the PPF maturity period is 13 years and your goal is 10 years, then you will fall short of meeting your financial goals.

Return Expectation

Next and the biggest step is the return expectation from each asset class. For equity, you can expect around 10% to 12% return. For debt, you can expect around 7% return expectation.
When your expectations are defined, then there is less probability of deviating or taking knee-jerk reactions to the volatility.

Portfolio Return Expectation

Once you understand how much is your return expectation from each asset class, then the next step is to identify the return expectation from the portfolio.
Let us say you defined the asset allocation of debt:equity as 30:70. Return expectation from debt is 7% and equity is 10%, then the overall portfolio return expectation is as below.

(70% x 10%) + (30% x 7%)=9.1%.

How much to invest?

Once the goals are defined with target amount, asset allocations is done, return expectation from each asset class is defined, then the final step is to identify the amount to invest each month.
There are two ways to do. One is constant monthly SIP throughout the goal period. Second is increasing some fixed % each year up to the goal period. Decide which suits best to you.
Hope the above information will give you clarity before jumping into equity mutual fund products.

How many mutual funds are enough?

How many mutual funds do we have? Is it 1, 3, 5 or more than 5? The answer is simple…you don’t need more than 3-4 funds for investing in mutual funds. Whether your investment is Rs.1,000 a month or Rs.1 lakh a month. With the maximum of 3-4 funds, you can easily create a diversified equity portfolio.

Having more fund does not give you enough diversification. Instead, in many cases, it may create you portfolio overlapping and leads to underperformance.

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Was talking to a cousin of mine about his investing. He said he had some ‘Mutual Fund Investments’. When I saw it, it was appalling. He is very close but was not too forthcoming about why he had chosen such an array of funds. However he earns very well and spends almost nothing (comparatively) which means he can pretty much do whatever he wants with his money and still not worry about retirement funds.

Another cousin started a SIP which actually got stopped for some technical reason. However by the time the second debit should have come he had already made a fixed deposit with the balance money. Again a case of earning in crores (I did debate with the word millions, then corrected myself) but spending in ‘000s allows all investments to be in bank fixed deposits without too many worries.

Lessons:

1. Most people are employed far beyond the economic need for a job.

2. An office to go to every morning is a social, family and a self created need.

3. Most people will continue to be employed beyond the need for money, because they do not KNOW what to do.

4. Most people will continue to be ’employed’ even if the salary is cut in half post retirement.

5. One person was willing to come to office if apart from ‘coming to office costs’ he earned Rs. 5000 a month. His last drawn salary? Rs. 54,000 p.m.

6. When it comes to managing money, MEN do not ask for directions. WOMEN think their husbands (unless they have learnt it the hard way) are managing their money well.

7. Most people do not set FINANCIAL goals. This leads to a lot of money being friterred away on things which they may not need.

More Random Thoughts:

Recently saw some very poorly written personal finance articles in Hindu Business Line. Respect for that group is still very, very high. Hopefully they will correct it soon. Surely personal finance does not have such a shortage of writers, Mr. Kumar.

Is Securities and Exchange Board of India (SEBI) pushing through mutual funds dematerialisation to create revenue for National Securities Depository (NSDL) or for the DPs? Clients have no benefit in holding the units in a Demat mode (you cannot sell, transfer, pledge, gift….- it can only be redeemed), and the statement has no commercial value (if you lose it, get another one, NORMALLY FREE). Not sure…

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Rome was not built in a day, goes a popular saying. Same is true for most of our life goals. Children’s education, a dream house, and savings for retirement are all accumulated over the years assiduously and not in one go. Here is where the importance of saving comes in. And not just plain vanilla saving but a saving that keeps up with time and inflation.

What is Systematic Investment Plan (SIP)?

As the name suggest, an Systematic Investment Plan (SIP) is something which brings a systematic approach to savings and builds up a corpus for your life goals over a period of time. One can start an SIP for as low as Rs 500 per month through a mutual fund of your choice.

What makes SIPs essential?

SIPs not only help you beat volatility by remaining invested in the long run but also make you a disciplined and patient investor. The second advantage an SIP offers to investors is by creating a sizeable corpus over the years even if the contributions made are minimal.

How can you start investing in SIP?

The process towards investing in SIP is quite simple. After zeroing in on a particular scheme of a fund house, you can mandate your bank to debit certain sum from your account towards investment through Electronic Clearing Service (ECS).

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Yes, a millionaire! Certainly your kids have the chance to become millionaires as they have huge time advantage, compared to rest of us, when it comes to getting rich. It is an irony of life that you do not have money in hand to invest when you are as young as 20 years. And when you are 45 years old, you have money, but not enough time for your investments to reap benefits.

Time is the key for compounded growth to work magic! Your child exactly has that ‘time’ in hand. And you can invest for your little one to make him a millionaire! SIP is a way to go!

How Does SIP Helps Getting Rich?

SIP is an investment method that helps compounding your wealth. Getting richer is a lot simpler if you have time in hand and you invest regularly. Here is how Systematic Investment Planning helps your child become rich.

Start With What You Can

Starting early with what you can is the first step to getting rich. When it comes to investing through SIPs, you do not have to wait to collect a huge amount to invest at once. They are affordable and these little investments help you achieve your long-term costly goals like child education, retirement and child marriage.

The beauty of investments through SIPs is that it has compounding effect on your little investments. As low as INR5,000 monthly investment, swells up to a huge corpus, in the long run. If the investor starts early, he can start with even lower monthly investments. The investor also has the option to increase the monthly investment amount at any time.

Regular Investments Help

Investing a fixed amount regularly for a pre-determined time period helps. This is a more successful strategy that helps you beat overcome the market conditions. Even though you tide over the market’s ups and downs, you would not end up with losses. Thus, returns from SIP investments are unaffected with the market’s volatility. Is it not a simple way to getting rich!

Easy to Invest

Unlike your household bill payments, your SIP amount can be automatically debited from your bank account on the predetermined date. It can be achieved through Electronic Clearing Service (ECS) facility, thereby not disturbing a fixed amount every month.

In conclusion, the best part of SIP investment is that it is designed to beat the lows and highs of the market in long run. Thus, it offers stability to the invested amount.

Use online financial advisory services from Moneymindz to build your personalised plan. Start your Financial Planning now to reap golden benefits for child’s future.

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