MFs' online tools can tell how much to save
Individuals as well as
corporates can set aside some amount every month to meet periodic
outgoes, which are short term in nature. The same could be done for
meeting long-term goals as well.Here, we discuss some examples.
As
an individual investor, you can use SIPs to accumulate some amount every
month to meet your expenses for your family vacation that you aspire to
every two years. For example, suppose you put in Rs 10,000 each month
through an SIP in an income fund and you get an average annual return of
about 10%. So at the end of the two years, when you are ready for your
family vacation, you have a corpus of about Rs 2.67 lakh.
As a person who is in charge of finances at a small manufacturing unit,
you need to pay advance taxes every quarter. Here, you can use an SIP in
liquid schemes of good fund houses for your quarterly payments. For
example, if you have an advance tax payment outgo of about Rs 3 lakh for
the next quarter, you can put in Rs 1 lakh each month in the SIP so
that, at the end of the third month, you have a little over Rs 3 lakh.
Or you can put in Rs 99,000 in the SIP and have just about Rs 3 lakh.
Here, we are assuming a return of 8% per annum for the liquid fund -a conservative estimate given that in the last one year most liquid funds have given higher than 8% return. Corporates can use this for service tax payments, dividend and employee bonuses, according to financial planners.
One can use SIPs in equity funds for building a long-term corpus for retire ment planning, child's higher education, wedding, etc.
Most fund houses tell their customers to go for SIPs in equity funds for building a large corpus for the future. Here, other than discipline, the compounding impact of investing over several years also kicks in, which ultimately brings in a large sum of money for the investor. Most of the top mutual fund houses have SIP calculators on their websites.Make use of these tools to plan your SIP for each of your life's goals. You can use those calculators to get a good idea about the amount you need to save every month, how much corpus you need for your long-term goals, etc.
Also, since there could be some tax implications relating to these investments through SIPs, may be you can seek some professional help from financial planners, advisers andor tax consultants.
Here, we are assuming a return of 8% per annum for the liquid fund -a conservative estimate given that in the last one year most liquid funds have given higher than 8% return. Corporates can use this for service tax payments, dividend and employee bonuses, according to financial planners.
One can use SIPs in equity funds for building a long-term corpus for retire ment planning, child's higher education, wedding, etc.
Most fund houses tell their customers to go for SIPs in equity funds for building a large corpus for the future. Here, other than discipline, the compounding impact of investing over several years also kicks in, which ultimately brings in a large sum of money for the investor. Most of the top mutual fund houses have SIP calculators on their websites.Make use of these tools to plan your SIP for each of your life's goals. You can use those calculators to get a good idea about the amount you need to save every month, how much corpus you need for your long-term goals, etc.
Also, since there could be some tax implications relating to these investments through SIPs, may be you can seek some professional help from financial planners, advisers andor tax consultants.
Use SIPs To Invest In A Disciplined Way
Investors can systematically invest in MFs to save for their financial goals
Systematic investment plans
(SIPs) are one of those methods of in vesting that are fast
gaining in popularity among Indian mutual fund (MF) investors. SIPs are a
vehicle to invest through the MF route and are similar to recurring
deposits in banks, without the guarantee but with the chance to earn
higher returns.In fact, SIPs in various types of MF schemes could be
used to meet several life goals.
Choices galore
SIPs are mainly differentiated by their periodicity, which could range from daily , weekly, monthly to quarterly . In India, monthly SIPs are the most popular ones. SIPs are also differentiated by the money that is invested: Either a fixed sum is invested at a regular interval, or a fixed portfolio amount is set and a number of units are bought to achieve that set portfolio amount.Rupee Cost Averaging: In the first case, irrespective of the market level, the investor would invest a fixed sum of money . So if the market is up and the MF unit's net asset value (NAV) is at a high, he she will get less number of units. On the other hand, if the market is low and the NAV is also low, heshe will get more number of units for the same amount of money that is prefixed. This is called the rupee cost averaging (RCA) method of investing.
Suppose you want invest Rs 1,000 in a particular scheme and the current NAV is Rs 10.So you get 100 units. Now suppose if the market goes down and the NAV of the scheme the next month falls to Rs 9.75, you would get 102.56 units of the scheme. That is, you will get more units of the same scheme.And when you consider your total investment of Rs 2,000 over two months, your average cost of 202.56 units is Rs 9.87.Value Cost Averaging: The second variant, which is not exactly SIP but also brings in the periodicity of investments, is called the value cost averaging (VCA) method of investing.In VCA, the investor has a prefixed portfolio value and, depending upon the market volatility, buys more or less of the units to reach the value. In this case, let's suppose you want your portfolio value to go up by Rs 1,000 every month. Now you invest Rs 1,000 at the start of your investment period and, at the end of the first month, its value is Rs 1,050. Then at the start of the second month you will invest Rs 950 only, so that your portfolio value becomes Rs 2,000, with the rise for the month being your pre-fixed Rs 1,000.
But “in India, the fixed amount SIP is the more popular mode of investment“, according to Dhiraj Mittal of Prime Capital Services. “Although some of the fund houses are selling the VCA process of investing, that's yet to pick up pace,“ says Mittal.
Advantages of SIP
The regularity of investing through the SIP mode brings in a host of benefits for investors, according to financial planners. SIPs inculcate a disciplined approach to investing.This is more important than the returns generated over the period of investment, they say .
Although financial planners advise their clients not to look at returns on a daily basis, total funds accumulated through the SIP mode are quite huge if such SIPs are continued for a long time. This is mainly due to the magic of compounding in an investment over a long period. For example, a monthly SIP of Rs 5,000 for 20 years can accumulate nearly Rs 75 lakh if the average annual return is 15%. If the rate of return falls to 10%, which is closer to a bank's fixed deposit rate, the total returns are nearly Rs 38 lakh.
An SIP for every goal
In India, most investors go for SIPs in equity schemes. However, SIPs could be used in all types of funds -from equity to debt to liquid, say financial advisers and planners. “SIP is the mode of entry into the MF investing mode. You can use it for any type of fund to reach any kind of financial goal,“ says Mittal. Although most b lieve SIPs could be used only by retail investors to meet their life goals, cor porates -small and large -can also use SIPs to meet theirs. “If investors and cor porates have some short-term payments or expenses that are not monthly in nature but periodic, they can also use monthly SIPs to accumu late and pay when the time for payment comes,“ says Mittal. Examples can be school fees, which are not paid every month, and saving for periodic holidays by individual investors.
Corporates, on the other hand, can invest through SIPs to build a corpus for quarterly advance tax and service tax outgo, annual employee bonus and periodic dividend payments, etc. “Here, the underlying scheme is chosen with the final objective in mind and then SIPs are set up accordingly,“ points out Mittal.
SIPs are mainly differentiated by their periodicity, which could range from daily , weekly, monthly to quarterly . In India, monthly SIPs are the most popular ones. SIPs are also differentiated by the money that is invested: Either a fixed sum is invested at a regular interval, or a fixed portfolio amount is set and a number of units are bought to achieve that set portfolio amount.Rupee Cost Averaging: In the first case, irrespective of the market level, the investor would invest a fixed sum of money . So if the market is up and the MF unit's net asset value (NAV) is at a high, he she will get less number of units. On the other hand, if the market is low and the NAV is also low, heshe will get more number of units for the same amount of money that is prefixed. This is called the rupee cost averaging (RCA) method of investing.
Suppose you want invest Rs 1,000 in a particular scheme and the current NAV is Rs 10.So you get 100 units. Now suppose if the market goes down and the NAV of the scheme the next month falls to Rs 9.75, you would get 102.56 units of the scheme. That is, you will get more units of the same scheme.And when you consider your total investment of Rs 2,000 over two months, your average cost of 202.56 units is Rs 9.87.Value Cost Averaging: The second variant, which is not exactly SIP but also brings in the periodicity of investments, is called the value cost averaging (VCA) method of investing.In VCA, the investor has a prefixed portfolio value and, depending upon the market volatility, buys more or less of the units to reach the value. In this case, let's suppose you want your portfolio value to go up by Rs 1,000 every month. Now you invest Rs 1,000 at the start of your investment period and, at the end of the first month, its value is Rs 1,050. Then at the start of the second month you will invest Rs 950 only, so that your portfolio value becomes Rs 2,000, with the rise for the month being your pre-fixed Rs 1,000.
But “in India, the fixed amount SIP is the more popular mode of investment“, according to Dhiraj Mittal of Prime Capital Services. “Although some of the fund houses are selling the VCA process of investing, that's yet to pick up pace,“ says Mittal.
Advantages of SIP
The regularity of investing through the SIP mode brings in a host of benefits for investors, according to financial planners. SIPs inculcate a disciplined approach to investing.This is more important than the returns generated over the period of investment, they say .
Although financial planners advise their clients not to look at returns on a daily basis, total funds accumulated through the SIP mode are quite huge if such SIPs are continued for a long time. This is mainly due to the magic of compounding in an investment over a long period. For example, a monthly SIP of Rs 5,000 for 20 years can accumulate nearly Rs 75 lakh if the average annual return is 15%. If the rate of return falls to 10%, which is closer to a bank's fixed deposit rate, the total returns are nearly Rs 38 lakh.
An SIP for every goal
In India, most investors go for SIPs in equity schemes. However, SIPs could be used in all types of funds -from equity to debt to liquid, say financial advisers and planners. “SIP is the mode of entry into the MF investing mode. You can use it for any type of fund to reach any kind of financial goal,“ says Mittal. Although most b lieve SIPs could be used only by retail investors to meet their life goals, cor porates -small and large -can also use SIPs to meet theirs. “If investors and cor porates have some short-term payments or expenses that are not monthly in nature but periodic, they can also use monthly SIPs to accumu late and pay when the time for payment comes,“ says Mittal. Examples can be school fees, which are not paid every month, and saving for periodic holidays by individual investors.
Corporates, on the other hand, can invest through SIPs to build a corpus for quarterly advance tax and service tax outgo, annual employee bonus and periodic dividend payments, etc. “Here, the underlying scheme is chosen with the final objective in mind and then SIPs are set up accordingly,“ points out Mittal.
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