Back to Blogs SIP with Purpose
By Jayna | 01/04/2017
Whether you are a businessman or a woman, a working-class professional in mid thirty, a millennial just started getting your pay checks or to other extreme heading toward your sunset year and having desire to live a comfortable and respectful life, one commonality in your thinking and expectation setting is how to secure your financial future. Each one of you have multiple and distinct financial goals to accomplish at different intervals in life and also a desire to achieve maximum financial freedom to pursue your dreams. The puzzle that goes around in your mind is how will you accomplish these goals? One fine day you feel fortunate to have found the best answer i.e. make investments and you turn towards investing world. Now You have become savvier and smarter than before and start tracking various asset classes viz. debt, equity, gold, real estate, alternatives such as commodity. The buzz around you, financial press that you read, the favourite news channel that you watch, over and above, your instinct, your macro and micro analysis guides you towards investment in equity as an asset class especially when your investment time span is long term. Now the new dilemma is, what approach you will adopt to invest in equity? Will you invest directly in stocks? You are afraid which stocks, on which criteria you should analyse them, what is the correct level of valuation to invest? You also need to decide about the holding period for each individual stock. Too much of work! You don’t get enough time to do this with your daily chores of activities and job. You keep postponing your investment decisions and market keeps scaling high. You now terribly feel that you missed golden investment opportunities! You need someone to be your investment mentor, understand your situation and circumstances, ultimately you decide to meet a financial advisor! After few meetings and conversations with your financial advisor, you are advised to still invest in equity as a strategic asset class but indirectly through mutual fund route. Your concern about the market volatility is addressed through investing in a systematic way and make SIPs each month for a number of years. You get convinced, yet a question is unanswered. How much should you invest each month and for how many years? Well, that depends upon your situation, circumstances, risk tolerance and the goal that you wish to achieve in current and future time span.
Let us consider following four scenarios.
1. If you are business person wishing to hand over your business to next generation in ten years, you need to invest for 120 months (10*12) , the types of SIPs will depend upon the corpus that you wish to accumulate and your return expectation. Return expectation will be based on capital market expectation in future and your risk tolerance.
2. The goal that a working class professional might want to achieve in next five year is building or buying a new house or buying a new car in next three years or sending a kid abroad for higher education after ten years. Here, multiple SIPs linked to each goal can be constructed that for 60 months, 36 months and 120 months with appropriate capital market expectations.
3. You are a millennial with an immediate goal to accumulate enough in the next two years for an expectant wedding and an exotic honeymoon abroad. A future goal could to bag enough wealth for your retirement. In this case the human capital is very high but financial capital is not there. So you need to do SIPs for two years i.e. for 24 monthly instalments and for twenty years i.e. for 240 monthly instalments subject to further review at the end of every three year.
4. You are aged fifty or more years and heading towards retirement and your human capital is depreciating. Based on current life expectancy estimates You still have 25 years to live and in all these years although you have accumulated financial capital but it is insufficient to live a comfortable and respectful retirement life wherein you can fulfil your dream of a vacation abroad each year with your life partner. The question is whether you can still do SIPs while in your fifties, the simple answer is yes. You can invest through SIPs till the date of your retirement and then take further investment calls.
So, in manners cited above, you can plan your investments by saving with discipline and forgoing some of your current consumption for better future.