The millennials suddenly find themselves in a situation where they are rightly perturbed about their financial outlook. The onslaught of the global pandemic has broken a lot of people all over. I can imagine their anxieties and fears for a world of tomorrow. The fabric of their hopes and dreams was simply torn apart by the three months of economic numbness.
This article lasers towards the relevant problems in the current times of economic distress and teaches you how to weather this storm with minimum losses. We at Hari G. Kamat’s Investment Avenue also aim at employing this preferred medium to educate the millennials and the youth about their own finances and enable them to make independent decisions with regards to their finances.
Let us deal with a well-known investment concept in the financial world today which is called SIP, which is short for Systematic Investment Planning. A systematic investment plan (SIP) is an investment vehicle offered by many fund houses to investors, allowing them to invest small amounts periodically instead of lump sums into mutual funds.
Before we get into the details, what’s important to know here is that the investor will indirectly be investing in the markets. You don’t invest ‘In’ a SIP but ‘through’ it into a mutual fund. He / She can dive into SIP’s without any knowledge about the markets. It also frees up a lot of time and sweeps away the constant niggling compulsion of seeing how your money is performing every two hours or so. The fund manager of the fund house will look into that. All you must do is showcase consistency in your approach. Chart your goals; decide the monthly investment required to slowly climb up towards it and cultivate discipline.
This by no means is a get rich quick path. In fact, the concept of SIP is propelled by a philosophy of compounding. Let us say you invest 5000 bucks monthly in an equity fund that returns 12% CAGR (Compounded Annual Growth Rate), and then in 10 years you will have accumulated 11.62 lakh. The reason for this magical jump is compounding. The longer it stays, the bigger your corpus gets.
A few other common misconceptions about SIP’s are, the more frequent the SIP, the better it is. Research has repeatedly proven that increasing the frequency of SIP’s isn’t going to accelerate your rate of returns, but it does increase the operational inconvenience on your part. A monthly SIP is the best way to benefit from market fluctuations while also keeping the paperwork in check. Another one is, complex SIP’s are better than a simple SIP. For instance, one type of an SIP allows you to reduce your investment in a rising market and increase it in a falling market. Though it looks good in theory it can create more than a few complications. These could lead to a lower accumulated corpus if the markets rally and a greater financial strain should the markets decline for a prolonged period. Stopping your SIPs in a bear phase too is 2 By Hari G Kamat a bad idea as you could lose out on the opportunity to average out your buying price lower.
When the goals are long term, one of the key lessons is that small increments in your investment can generate big leaps for your accumulated wealth. Let me share a personal example with you. At first Madhav was investing 20000 monthly in an equity fund offering a 12 percent interest rate. In 30 years he would have seen his corpus inflate to a plump 7.06 crore. We suggested that he raise his yearly contributions by 10 percent. At the end of it, he was able to amass 15.01 crore. That is the power of small increments.
Allow me to share another piece of wisdom regarding SIPs. Start at an early age. If you are already late, start now anyways and don’t forget to pass on this wisdom to your progenies. Say your goal is to save 1 crore for a long term goal, like retirement. You start investing at an age of 25. You have 35 years before you turn 60. You will need to do a SIP of 1540 monthly in an equity fund assuming 12 percent returns per annum. If you start investing when you are 35, you would have to invest an SIP of 5270 monthly for the remaining 25 years. So, develop the habit of saving early. Your goals will be achieved quicker and leave you with a headroom for other, more aspirational goals later on.
Fortunately SIP’s offer a lot of flexibility with respect to the investors goals as well. For goals that are more than five years away, equity funds are at your disposal. For goals that are three to five years away, equity savings and conservative hybrid funds can do the job. For goals that are one to three years away, accumulate your corpus in short term debt funds. For goals that are due in the next one year, ultra-short duration funds or liquid funds are just fine. It is at the discretion of the investor to receive the returns at the end of the SIP’s tenure or at a periodic interval.
One could restrict the definition of SIP as an investment strategy, but that might be an incompletion. The underlying philosophy here is to start early. Make small investments periodically rather than a huge investment haphazardly. It’s about the effects of compounding. The habits of SIP’s can trickle their way into other domains of your life and have the same impact as an SIP, which is wealth creation. Wealth is not always monetary. Relationships, learning, physical and mental wellbeing create wealth for our lives through the compounding effects as well. So let the power of habit steer you out of these chaotic and troubled times in a planned, disciplined and systematic way.