Systematic investment plans are considered the ideal method of investing in mutual funds because of their discipline, flexibility in amount, and tenure adaptability. Since you can decide on the frequency of the investment, weekly, monthly, or quarterly, it becomes easier to accumulate funds for short and long-term financial goals depending upon your priorities. For goal-based SIP investments, you need to factor in the goal amount at the current cost, the term of investment, the average rate of inflation, and your return expectations.
The first step in goal-based investments is to identify your requirements according to priorities. Whether you want to plan to buy a property or save for a child’s higher education, or your retirement, it all depends on what you would like to keep at the top of the list. Hence, deciding on a list of goals as per your preference should be the initial step to
Understanding the Financial Goals
It is vital to classify your financial goals, as they will be key to your investments for a major part of your life. The goals can be classified for ease as long-term, medium-term, and short-term.
The long term can be defined as those that you would like to achieve in 5 years or more. Medium-term goals are for goals less than 5 years, and short-term ones are for 6 months to 3 years.
To choose the right SIP, you should first calculate expected SIP returns based on your goal horizon.
For instance, Pamela wants to build a retirement corpus by funding mutual fund SIPS for 15 years.
Current cost of her retirement: 50 lakhs
Average Annual Inflation: 7.5%
Inflation-adjusted goal: 1.48 crore
Hence, the SIP amount required to be invested is for 1.48 crore and not for 50 lakhs.
Expected rate of return: 12% p.a. (for equity mutual fund)
Monthly SIP amount = Rs.29,500/-
If you reduce the tenure, the amount will increase, but if you have a higher risk tolerance level to go aggressive for a higher return of 15-18 %, the tenure required may be reduced.
Assessing the Risk Appetite
While choosing an SIP in mutual funds, you need to assess your risk tolerance level first. Not everyone can go all aggressive with equity funds, especially if the SIP is for a short tenure. However, if you are looking for higher returns, equity is the best bet. Amongst equity, large-cap stocks that invest in well-established corporations with strong market capitalisation are ideal for a moderate risk investor, for their stable returns. Mid-caps and small-caps are best for aggressive investors who are willing to take risks for higher returns. On the other hand, debt funds are a safer option for conservative investors and short-term goals as they provide low but stable returns. You can also go for a balanced mixture of equity and debt by investing in hybrid funds and enjoy comparatively better returns, but with low risk.
Your risk tolerance level depends on many socio-economic factors as well. If you have just started earning and are looking for a 15-20-year horizon of investment, you will prefer to be aggressive with your fund choices. A senior citizen who is looking to invest hard-earned savings would like a less risky fund with stable returns. Likewise, your disposable income will reduce if you have multiple dependents in your family, including your spouse and parents.
Determine the Investment Tenure
The beauty of the SIP mode of investments lies in the power of compounding and rupee cost averaging. Compounding helps to earn returns on your return that are subsequently reinvested, making your money grow exponentially. Rupee cost averaging takes care of the risk part as it mitigates market volatility in the long run. In a bull run, the units brought in SIP will be low as the value of a mutual fund will be higher, and in a bearish market, the same units will cost low, and the number of units purchased will be higher. In this way, the cost of investment is averaged out over time. Hence, it is vital to determine the investment horizon before you begin your journey for wealth accumulation.
Deciding on the Monthly SIP Amount
To be exact, while deciding on the amount of SIP, identify the different amounts required for your different goals, along with the tenure after which it is required. For example, you may require 15 lakhs for your child’s higher education after 12 years. Then, you need to calculate the current cost of the goal. Once you know this amount, adjust it with the available inflation rate, which will considerably increase the amount. Next, calculate the current investment amount with the inflation rate to get the exact amount you need to invest now. You need to then check your monthly income and expenditure to find your investible amount. This is important as consistency in payment is crucial for the rest of the tenure.
Selecting the Right Fund Type
You also need to look at the mutual fund types to determine that you receive the expected returns, or else you will run short of all your financial goals. If you are willing to take risks but need to ensure high returns on a long horizon, diversified equity funds are best suited to your needs. You want to just park your funds for a few months without the stress of losing capital, yet earn a return, debt mutual funds are the best. A mixed or hybrid fund is the best option if you have time on your side and need safety with better returns. However, whichever fund you choose, be sure to check the fund’s performance in various phases of the market and the expense ratio, which is the cost of investment and objective, so that it best aligns with your investment aims and scope.
Using Tools to Plan Efficiently
Effective planning requires effective tools to ensure success. A goal-based SIP calculator or a Future value calculator aims to give investors an estimate of the wealth accumulation if a certain sum of money is invested for a specific tenure at a standard rate of return. The rate of return varies as per the type of funds, the market conditions, etc. It has a pre-programmed algorithm that simplifies your task in calculating the future corpus without any manual error and in a few seconds.
Reviewing and Adjusting Periodically
Although consistency is important, when life happens, change becomes the only thing consistent. Your goals may change, the retirement corpus you were looking for might not be enough, your income may take a hit due to medical reasons, or the fund may not perform to your expectations. This makes reviewing your portfolio annually or at regular intervals an indispensable task. The SIPs need to be adjusted with your new timelines, amounts, and objectives as per changing priorities.
Conclusion
To wind up, it can be said that to get the best out of the SIP method of investment, assessing your risk appetite, having a clear goal, and choosing the right fund type are as important as setting the goals and following through consistently. Pre-planning agendas, wise planning strategies, and post-planning reviewing should come together to give you the ideal wealth corpus.
