The, Stock Market, both Nifty and the Sensex made lifetime highs last month by touching 17932 and 60,303 respectively. These benchmark indices have given 131% and 118% returns respectively from their Mar/Apr 2020 lows. The market’s recovery has been very sharp and almost vertical, not giving many opportunities to enter. During such times, a better way to invest is through STP(systematic transfer plan) for a lump sum amount or through SIP(systematic investment plan) for making the investments over a longer period of time at regular intervals.
So, let’s see how SIPs can be used effectively for investments.
What is SIP?
A systematic investment plan is a process of investing money at regular intervals of time in any asset class, akin to our monthly contribution towards DSOPF. A fixed amount of money gets deducted from our bank account based on our mandate and gets invested in the already chosen asset class (equity/debt/gold etc).
Advantages of SIP?
- There is no need to accumulate a large amount of money to invest in Stock Market. We can start by investing a small amount of money at regular intervals.
- We can invest on a monthly basis based on the available cash flow in a disciplined manner, keeping in view our financial goals. It would help us avoid wasteful expenditure.
- There is no need to try and time the market. Regular investments will buy units at different values of NAVs (Net Asset Value as declared by mutual fund schemes at the end of each business day) based on the market volatility, thus cost averaging the purchase price.
- A Small amount invested at regular intervals for a longer duration can create enormous wealth. Let’s see an example. Rs. 15000/- invested per month for a period of 10 years at 12% RoI (Return on Investments) will create a maturity corpus of Rs. 33.28 lakh whereas Rs 5000/- invested per month for a period of 30 years at the same RoI of 12% will create a maturity corpus of Rs. 1.52 crores. The investment amount remains at Rs. 18 lakh in both cases. The longer is the duration of investment, higher the compounding effect.
- It avoids emotional investment decisions.
How does SIP work at different stages of working life?
- First 7-10 years of working life. This is the time when most of us are in our peak youth and nothing seems impossible. In our early working years, we often indulge in luxury, throwing parties, and buying expensive cars and gadgets. Sometimes we even borrow money or take loans for it. While we might not be clear about our future financial goals in the beginning, it’s wise to begin saving and investing through SIP as early as possible. As explained earlier, the sooner we start, better is the compounding.
- Next 10-15 years of working life. Most of us get married during this phase of our working life and have children. SIP is a very potent tool to start accumulating funds for children’s education and marriages, being important financial goals. Investing a small amount monthly through SIP, based on risk profile, builds corpus for financial goals. SIPs cover education, marriage, buying a house, vacation, and retirement. Linking SIPs to specific goals helps reach targets and avoid premature liquidation for non-essential desires.
- Pre Retirement phase of working life. This period generally falls between the age of 50 to 60 years or when we plan to retire from active working life. Though the planning and the investments for the retirement phase must commence at the beginning of the working life, this is the time when we have the maximum disposable income and, accordingly, should invest the maximum towards our retirement and create wealth through SIPs. With the advancement of medical science, our retired life is almost as long as our working life. So, we need to plan it well, though we in the Armed Forces have a pension coming to us every month.
Important points to keep in mind for SIPs
- Plan out the SIPs keeping in mind the asset allocation based on risk appetite, expected RoI, and time required to achieve the financial goal.
- Always link the SIPs with each of the financial goals. There are better chances of achieving the desired target.
- Do not stop the SIPs based on market volatility. In fact, we should try and invest more during the bad phases of the market. We get better returns from the equity market because of this nonlinear movement of the stock market.
- Increase the amount of SIPs as our income increases with time and we have more disposable cash available.
The Systematic Investment Plan is a very potent tool for investing regularly in stock market in the asset class of our choice (equity, debt, gold, etc) through mutual funds. It also provides us with the option of investing over a longer period of time during present market conditions when the markets are sitting almost at an all-time high and have risen more than 100% from their lows made during Mar-Apr last year
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