Has the COVID conundrum left you wondering which Mutual Funds make sense right now? Here are three fund categories that are worth considering – in increasing order of risk tolerance!
Dynamic Asset Allocation Funds
Dynamic Asset Allocation funds present an ideal solution to the moderate risk taker’s quandary at the moment. Since they implement automatic portfolio rebalancing models that go against the grain of market movements.
They act as a safety mechanism against a host of behavioral biases that would otherwise plague any investor who’s endured the absurd roller-coaster ride that equity markets have witnessed since March! For multiple reasons, not all Dynamic Asset Allocation funds are worth considering right now; so be sure to seek the support of an expert Financial Advisor before you invest in one.
Value Funds
Traditionally, exogenous shocks such as COVID-19 have thrown the door wide open for value investing. When the going is good and hot money is in full flow, it is growth stocks that benefit the most. However, when a crisis results in severe market dislocations, sectoral leadership undergoes dramatic shifts.
In times like these, the high margin of safety in value stocks makes them lucrative as contrarians come cherry-picking. For this very reason, Value Funds have always outperformed Growth Funds during post-crisis revivals.
Risk-taking investors who have the patience to weather returns that are frustratingly uncorrelated with index movements, and have a time horizon of at least 3-5 years from today, should add value funds to their portfolios at this juncture. Invest in a staggered manner though.
Small-Cap Funds
Small-Cap Funds invest in stocks that lie beyond the top 250 companies by market capitalization. For the past three years, these stocks have received the drubbing of a lifetime – most of the companies in this space are now trading at bargain-basement discounts of 60%-80% to their January 2018 peaks.
While they may well correct further and will likely be the last to recover from this cycle, their lucrative valuations are hard to ignore at this point.
Small Caps tend to rally after Large and Mid-caps do; but when they take off, they switch on their afterburners and rocket ahead with such force that fence-sitters are left gasping in awe! If you’re a savvy investor who doesn’t break into a sweat every time markets move sideways, this is an excellent time as ever to accumulate units in a small-cap fund in a staggered manner. You’ll need to have a 5-year holding time horizon, though.
Confused about where to invest? Leave it to the experts! Get in touch with us today.
It is that point of the year…the stock market is at its all-time high. All this while you waited for this opportune moment to begin investing. But wait! Don’t lose yourself in the exuberance all around. You never know where the market is heading the next moment.
The questions remain unanswered:
* Is the market going to rise further or is it going to fall?
* Should you be a skeptic and wait for a correction or cheer up and invest right away?
Waiting for a market correction to start investing would result in a loss of opportunity. This is exactly why you should get going immediately. If you keep waiting for a market correction, you will stay stuck. This is why you should invest, even at a market high, as the markets are only going to go higher. Sure, there will be a few hiccups on the way, but the general market trajectory is going to be largely upward-looking.
In case you are a novice investor, this time demands higher levels of composure from your end. Instead of placing impulsive bets and repenting later, sit down and formulate an investment strategy.
Review the entire portfolio
When you initially constructed a portfolio at the beginning of the cycle, markets must have been quite different. Now that so much time has elapsed in between, chances are the valuations might have changed.
The reasons which made you buy that bunch of stocks might no longer be existing. The market leaders might have changed ranks. In such a situation, sticking to laggards might end you in losses. So, use this time to review your entire portfolio. Weed out the stocks which don’t seem valuable anymore.
Re-balance the portfolio
You need to know that market volatility affects your portfolio’s asset allocation. Your original asset allocation might have been in a ratio of say 50:50 (equity: debt). But the steadily rising markets might have skewed the original allocations.
It means that now the ratio must have become say 70:30 (equity: debt). On one hand, it may seem like a lucrative opportunity to accumulate more wealth. But if it is not in line with your risk preferences, you may land in trouble.
You got it right! Your portfolio has now become riskier than you actually can digest. If you don’t want to carry a riskier portfolio, then it is better to re-balance it. Re-balancing involves bringing the skewed allocation to its original asset allocation of say 50:50 in this case.
Diversify your portfolio
Your portfolio might be composed only of small-cap or mid-cap stocks. In a rising market, a concentrated portfolio might increase your chances of losing money. When markets are high, you need to diversify. In diversification, you need to include stocks of different market capitalization. You can invest in large-cap stocks which tend to be stable during such volatility.
Start SIP in mutual funds
For first-time investors, trading in the stock market can be tricky. If that is not your ball game, then go for equity mutual funds. Equity mutual funds give a similar kind of investment experience; although with greater diversification and professional fund management.
You may think of starting a Systematic Investment Plan (SIP) in equity funds. In this, you will be consistently placing smaller bets. Over a period, it will give you the advantage of rupee-cost averaging.
Never invest in something you don’t understand
One mistake you shouldn’t commit is investing in a complicated financial product. Market highs are usually accompanied by fund houses launching sophisticated offerings. You might come across a lot of New Fund Offer (NFO) during this time.
These offerings might promise sky-high returns. However, you shouldn’t get enticed by the lucre, especially when the product offering is not transparent. Ensure that you understand what you are getting into before investing.
Moreover, invest in a financial product that has an investment history of 5 to 10 years. Even if you want to take the risk, don’t invest a lump sum in a single stock or fund.
Goal-based investing
Mapping specific mutual funds to specific goals will help you not only choose mutual funds correctly but also keep track of them in a better way. You can choose mutual funds depending upon the term and the risk profile of the goal.
All said and done, market highs and market lows will come and go. The volatility shouldn’t bother long-term investors. You should keep an eye on your goals and invest systematically.
Whenever a fund house launches an NFO, there is a lot of buzz in the market. You see ads everywhere; there are fund manager interviews where they extol the virtues of the new fund’s investment strategy, you see newspapers carrying articles detailing what the new fund is, and a whole lot more.
With so much happening around you, it is quite natural to get carried away and invest. But is it a good idea to invest in an NFO? Before we get into this debate, let’s first understand what an NFO is?
So, what exactly are NFOs?
When an asset management company launches a new fund, it first opens it up for a subscription for select days. The aim is to raise money for buying stocks for the fund’s portfolio and get it off the ground. This entire process is called NFO or New Fund Offer.
In a lot of ways, it looks like an IPO, and that pushes people to buy in the NFO period. But there is no advantage like IPO. We will come to that later.
Now, as per regulation, in India, the NFO duration cannot be more than 15 days for any mutual fund.
After the NFO period, if the fund is open-ended, it starts accepting new investments within a few days. So, you can invest in a fund after the NFO period as well.
If it is a close-ended fund, then an investor can subscribe to the fund unit only during the NFO period and will have to hold it until the end of the duration.
Now you know what NFOs are, let’s look at reasons we believe you should avoid investing in them.
1) No Track Record
The fund being launched is new and therefore has no track record. In the absence of a history, people tend to rely on a fund house’s past performance, which might not be the best approach.
That’s because a new investing strategy comes with its challenges, and you don’t know whether the fund house has the expertise to overcome those challenges.
Also, you only know the broad mandate of the fund. You don’t know what will constitute the portfolio or if it will be able to execute its mandate as intended.
So, if a fund is being launched in a category where funds already exist, picking a fund with a track record makes a lot more sense. You will know what you are getting into as you can evaluate it on various parameters like past performance, risk it takes amongst other things.
Always pick a fund with history and a proven track record over a new fund.
2) NFOs are not like IPOs – There is no benefit of investing in the NFO period
As we said in the beginning, people look at NFOs as they look at IPOs. They think they will get benefitted if the demand for funds increases, just like it happens in stocks. This notion can’t be farther from the truth.
That’s because a mutual fund’s NAV doesn’t get affected by demand and supply.
Here’s why – the number of units available in case of a stock is limited, so their price goes up if there is more demand. On the contrary, there is no limit to how many units a mutual fund can have. Units get created as and when required.
3) Higher cost
Every fund charges a fee to manage your money. This fee is a percentage of the portfolio and gets deducted from the returns generated. In technical terms, it is called the expense ratio.
A higher expense ratio means you pay a higher fee and it affects the returns you get
As per regulations in India, a fund with a smaller Asset Under Management (AUM) can charge a higher expense ratio as compared to a fund with a higher AUM.
Now, since the fund size, when launched is small, the AMC has the flexibility to keep the expense ratio on the higher side.
4) Launch Timing
AMCs launch new funds because they want to complete or increase their product basket, other times it could be because there is a demand in the market for a particular kind of fund. The reason could be any.
So, just because a fund is launched doesn’t necessarily mean it is the right time to invest in that fund category. Especially if the trigger is market demand (you can figure it out by seeing how many similar funds have come in the recent past), it is best to stay away.
But there are a couple of exceptions though:
If the NFO is for a close-ended fund and it fills a gap in your portfolio, you can consider investing. However, you need to be aware of the investing strategy the fund will follow as you will be committing for a specified duration.
When you are getting a discount during the NFO, like the 5% discount Bharat CPSE ETF NFO offered, it might be worthwhile considering them. In the Bharat CPSE ETF, you knew in which companies’ money will get invested (as it is an index fund) and you got a discount as well.
Conclusion
Investing in NFOs is like a shot in the dark. It will be wise to opt for an existing scheme that has a proven track record instead of going for something new or unpredictable.
Even if it is something unique and can be a good fit in your portfolio, wait for some time to see if the theme or investment strategy plays out as intended.
Portfolio management services (PMS) is a customized solution for high net-worth individuals (HNIs), it offers greater flexibility with an investor’s money and higher returns too.
So if you have a substantial amount you want to invest, such as say a crore, this service can prove beneficial. But is it the right product for you? Read to find out.
2. How PMS works for an investor
Portfolio management service (PMS) is provided by professional money managers to informed investors and can be tailored to meet specific investment objectives. PMS providers invest directly in securities through focused portfolios.
So one’s account will be kept separate and operated according to his/her investment mandate in a discretionary PMS, where an investment manager takes all decisions in sync with the investor’s goals.
3. How it is different from MFs
Unlike mutual funds, the investors’ assets here are not pooled into one large fund. Portfolio Management Service (PMS) uses a separate bank account and Demat account for each client.
The minimum investment amount is Rs 50 lakh for PMS. You can see the portfolio daily through your Demat account.
4. Higher risk-reward aspect
This structure allows the fund managers to take concentrated calls on their high-conviction stocks without too many regulatory and operational constraints prevalent in a mutual fund portfolio.
It may generate a higher return as the fund manager will have greater flexibility to choose or hold stocks and capitalize on the market opportunities in the smaller and newer companies that may have the potential for high growth. This may lead to a higher risk, which may be best mitigated through a long-term investment horizon.
5. It is a good option if…
If you wish to set this corpus aside for your retirement or in other words, for the long-term, this makes sense. The higher transparency and regular reporting as compared to a mutual fund are also plus points.
Stocks are bought and sold in your name, with the help of a power of attorney, which means you can monitor all investment activities in real-time. As a PMS investor, you may also hold direct interactions with fund managers, should you feel the need.
While choosing the right investment option most suited to meet your short-term investment need most of you tend to invest in Bank FD or savings account.
However, there are other short-term investment avenues that you can and should explore for your short-term investments. Arbitrage funds and liquid funds are two such investment options that can be considered to meet your short-term investment needs.
Arbitrage funds
These are mutual fund schemes that leverage the price differences in two different markets and thereby earn profits. As arbitrage funds are involved in simultaneous buying and selling of shares and making profits from market inefficiencies, they are considered to be low-risk investments and a safe option to park funds.
The returns generated by these funds depend on the volatility of the underlying asset. As these funds primarily invest in equities, they are categorized as equity mutual funds and taxed like any other equity mutual fund.
Liquid funds
Liquid funds, on the other hand, are open-ended debt schemes, that invest money in debt instruments such as treasury bills, commercial papers, certificates of deposits, and even term deposits, etc. Liquid funds are extremely liquid and have no exit load. The redemptions are processed within 24 hours.
Which fund to choose- Arbitrage Fund or Liquid Fund?
Arbitrage funds gained a lot of popularity after the Union Budget of 2014 when the minimum holding time for long-term capital gains on all debt investments was increased from 1 year to 3 years and long-term tax on equities was nil.
However, now under the new budget, even gains from arbitrage funds would be taxed; 10% if sold after a year and 15% if the holding period is less than a year.
While both arbitrage funds and liquid funds are low-risk, low-return types of investments, there are few things you must compare and choose the investment option most suited to meet your needs.
Time Horizon of Investment
One of the most important things to consider before choosing between the two is the time horizon for which you are looking to invest. If you are looking to invest for a few days or weeks, then you should invest in liquid funds.
Returns from arbitrage funds are dependent on arbitrage opportunities available, which are few.
Thus, for such a short time you may not be able to generate any returns from such funds and hence more suited for investors who are looking to invest for at least 3 months or more.
Tax efficiency
Before you choose to invest in either of the two options, understand the tax implications on your returns. Short-term capital gains on arbitrage funds are taxed at a flat rate of 15% and those from liquid funds are clubbed with your total taxable income and taxed as per your income tax slab.
Thus, the tax efficiency of the investment will primarily depend upon the tax bracket that you fall under. For low-income investors, liquid funds are more tax-efficient as compared to investors in the highest tax bracket.
Similarly, arbitrage funds are more tax-efficient than liquid funds for investors who are in the tax brackets of 20% and above as the short-term capital gains tax is 15% which is lower.
Liquidity of investment
Liquid funds score over arbitrage funds when it comes to liquidity. Redemptions in liquid funds are processed within 24 working hours but in the case of arbitrage funds, the redemption is made within 3 to 5 working days.
Returns
The returns generated by arbitrage funds are slightly higher than liquid funds, especially in volatile market conditions when ample arbitrage opportunities exist.
Exit Charges
The exit charges in case of liquid funds are nil, but there is usually a pre-mature withdrawal charge in arbitrage funds if the withdrawals are in the first few months.
Risk
Liquid funds and arbitrage funds are both low-risk investment options but arbitrage funds are slightly more risky than liquid funds.
While returns on liquid funds are similar to those of bank FDs, returns in the case of arbitrage funds are dependent on the arbitrage opportunities available in the market, which are erratic.
Conclusion
The choice of investment most suited for you will depend on your investment objective. Ideally, investors looking to invest for 6 months or more, especially those in the highest tax bracket should opt for arbitrage funds for better returns and higher tax efficiency
And those investors looking to invest for a shorter time frame or those in lower-income brackets can look at investing in liquid funds to make the most from their investment.
Are you looking for a dynamically managed investment? Do you want an investment in both equity and debt securities? You may consider putting your money in balanced advantage funds. It is a mutual fund that dynamically shifts between equity, derivatives, and debt instruments based on market conditions.
AMFI data shows net inflows of Rs 2,711 crore in balanced advantage funds in March 2021 compared to Rs 2,005 crore in February.
You could diversify your portfolio with balanced advantage funds if you are a first-time investor in the stock market. Should you invest in balanced advantage funds?
What are balanced advantage funds?
You have balanced advantage funds, also called dynamic asset allocation funds, as a category of mutual funds introduced by SEBI, the capital market regulator, in October 2017. It is a dynamically managed investment that puts your money in a mix of stocks and fixed income instruments.
You have the fund manager changing the asset allocation depending on market conditions to generate an optimum return with minimum risk for the investors.
For instance, the fund manager of the balanced advantage fund will reduce exposure to equities when stock markets peak and shift funds into debt securities. You would find the profits remaining intact, even if the stock markets correct or crash in a short time.
Should you invest in balanced advantage funds?
You may consider investing in balanced advantage funds only if you have a time horizon of at least three years. It balances holdings between equity and debt securities depending on market conditions to earn reasonable returns with low volatility as compared to pure equity funds. You can invest in balanced advantage funds if this is your first time in the stock market.
You must invest in balanced advantage funds if you want to diversify your portfolio against the pandemic-induced volatility of the stock market. The fund manager uses model-based triggers to adjust allocations depending on market conditions, without an upper or lower cap on the exposure to equity and debt instruments. It helps you earn risk-adjusted returns and attain long-term financial goals.
You can invest in balanced advantage funds if you want to avoid timing the stock market. For instance, balanced advantage funds increased exposure to equity instruments when the stock markets crashed in March 2020 due to the coronavirus lockdown.
However, it earned high returns on investment when the markets bounced back due to the economic recovery post-lockdown. You find automatic asset allocation protecting you from the volatility of the stock market.
You may consider investing in balanced advantage funds through the systematic investment plan or the SIP. It is a facility offered by AMCs that helps you invest small amounts of money regularly in a mutual fund scheme. You get the rupee cost averaging benefit, which helps you average out the investment cost over time.
You can invest in balanced advantage funds if you seek a higher return than fixed income instruments. For instance, lower interest rates in the economy mean you could struggle to get an inflation-beating return from bank fixed deposits.
It would help if you invested in balanced advantage funds as the equity allocation may ensure an inflation-beating return over some time. However, you must invest in balanced advantage funds only if it matches your investment objectives and risk tolerance.
Are balanced advantage funds better than balanced funds?
You have balanced advantage funds as a multi-dimensional investment when compared to balanced funds. For instance, balanced advantage funds may reduce equity allocation to around 30% when stock markets peak.
Balanced funds have a narrow allocation band and don’t offer sufficient protection to your portfolio during overvalued stock markets.
You may find balanced advantage funds as a better investment option than balanced funds for undervalued stock markets.
For example, it can increase equity exposure to around 80% when stock markets correct and generate significant returns over some time. However, a balanced fund cannot match the equity exposure of a balanced advantage fund during undervalued stock markets.
You have balanced advantage funds performing even when stock markets are flat. An arbitrage component takes advantage of the price difference in equity shares between the spot and the futures market. However, balanced funds cannot match this performance as they invest mainly in equity and debt securities.
You may invest in balanced advantage funds if you seek a higher return than a bank fixed deposit. It is a tax-efficient investment for those in the highest income tax brackets. It is suitable for first-time investors in stocks and can be a part of your core portfolio.
In a nutshell, you must invest in balanced advantage funds if you seek reasonable returns to achieve long-term financial goals.
In life, we need to take action. Today, I need everyone to start saving immediately if you haven’t yet.
How many of us have always thought about saving but think that we can always do it tomorrow? We always think that we can wait, but you will be waiting forever to be financially free too.
1. We can’t wait to go on a vacation but we can always wait to pay our mortgages.
2. We can’t wait to get rich quickly but we can always wait to learn how to get rich through time.
3. If you give yourself excuses, stop.
4. We can’t wait for early retirement but we will have to wait.
5. If it, is you, change?
6.If you want to feel financially secure, save.
7.We can’t wait to leave work but we can always wait to learn how to increase our wealth.
Trim down your spending and start saving. Otherwise, I guarantee you will regret it.
Many investors think of SIPs and mutual fund schemes as synonyms, however, that is not the case.
SIPs are merely tools that allow you to invest in a mutual fund scheme over some time.
It can be monthly, quarterly, or semi-annually depending on your financial goals.
It acts as a convenient option for salaried individuals to regularly invest in mutual funds.
The money can get deducted from their account automatically thereby engraining a financial discipline.
How to Start SIP Investment?
You can start a SIP with a minimum amount of Rs. 500. Here is how to start a SIP
investment if you wish to buy mutual funds.
• Basic Information The first step of SIP investment requires you to provide all your basic personal information in an online form such as your name, date of birth, address, mobile number, etc.
• Aadhar Based eKYC The above procedure for SIP investment can be simplified if you have an Aadhar card. You have to enter your Aadhar number and authenticate it with a One-Time Password (OTP).
This will pre-populate the online form with all your basic information details available in the UIDAI database.
IPV through a video call is not required if you complete the eKYC procedure through Aadhar as the UIDAI database already has your biometric information.
However, there is a statutory limit that will not allow you to invest more than Rs. 50,000 per fund house in a financial year if PAN card details are not submitted by you.
You can submit your PAN card and enhance this limit.
• Upload Documents In the next step, you are required to upload a scanned copy of your PAN card and address proof.
Benefits of Increasing Your SIP Investment Every Year
Here are some advantages of increasing your SIP every year.
• Counters Inflation While investing, the return adjusted for inflation is a significant factor to be considered.
As inflation increases every year, the amount you find substantial today may not have the same worth some years down the line.
Hence, if you do not increase your SIP investment amount every year, you ignore inflation which erodes the purchasing power of your hard-earned money.
• Builds A Bigger Corpus When your income and surplus increase every year, it makes sense to increase your SIP investment too.
It adds to the power of compounding and helps accumulate greater wealth by building a bigger corpus. Even a small 5% to 20% increase in the SIP investment plan at the end of 10, 15, or 20 years can make a big difference.
Also, you can avoid increased documentation as it will reduce the necessity of creating and tracking multiple stocks.
A Systematic Investment Plan (SIP), more popularly known as SIP, is a facility offered by mutual funds to the investors to invest in a disciplined manner.
SIP facility allows an investor to invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme.
The fixed amount of money can be as low as Rs. 500, while the pre-defined SIP intervals can be on a weekly/monthly/quarterly/semi-annually or annual basis.
By taking the SIP route to investments, the investor invests in a time-bound manner without worrying about the market dynamics and stands to benefit in the long-term due to average costing and power of compounding.
Top-Up SIP
Top-up SIP is a facility that lets you increase your SIP by a fixed amount or percentage (say 10%) every year or at pre-defined intervals in line with an increase in your income/savings.
This Top -Up in your SIP allows your investments to be in line with the increase in the cost of living or inflation and helps you plan for your financial goals right.
It can also help you reach your financial goals earlier or create a larger corpus for your goal.
Mr. A Normal SIP 5000 Investor A started investing 5,000/month using Normal SIP for 25 years with 12% Rate of Interest Total Investment: 15,00,000 95,00,000 Final Corpus after 25 Years
Mr. B SIP with 10% Top-Up 5000 Investor B started investing 5,000/month using Normal SIP for 25 years with 12% Rate of Interest Total Investment: 59,00,000 2.07 Crores Final Corpus after 25 Years
Power of Compounding
When you invest regularly through SIP and invest for the long term, the benefits are magnified by the compounding effect.
The compounding effect ensures that you earn returns not only on your principal amount (actual investment) but also on the gains on the principal amount i.e., your money grows over time as the money you invest earns returns.
SIP or Systematic Investment Plan is a plan through which a person can invest a small amount in a mutual fund at regular intervals (monthly/quarterly).
Hardly pinches your pocket
Most of us spend some money every day buying and eating a snack worth around Rs 15 or 20. Just saving that amount enables one to start investing in mutual funds through SIP.
That’s how small an amount is required to get started investing through SIP
While we all love and deserve to spend our hard-earned money, keeping a small amount aside each month can go a long way.
How often do we spend Rs 500 just over a whim? We may decide to order through one of the many food delivery applications or may meet up with a couple of friends at a coffee shop. Before we realize it, we end up spending around Rs 500.
Thanks to rising income and a higher standard of living, it doesn’t pinch as much as it used to.
After all, Rs 500 is what a couple of movie tickets or a couple of pizzas cost.
Most mutual funds allow investors to start investing with Rs 500 per month.
For an individual who has never invested earlier, starting with Rs 500 per month is also a promising beginning.
Therefore, this becomes a great way for new investors to begin as regularly investing Rs 500 per month over a longer period wouldn’t impact the investor’s wallet even if there is irregular income due to job loss or sabbaticals.
Magic of compounding
Investors would agree that Compound interest is one of the most powerful forces in the world! This is because of the impact it has on one’s investments. Investing over a longer period will create substantial wealth.
Investing just Rs 500 per month can result in the following scenarios
Over 10 years, a CAGR of 12% will offer Rs 1.2 lakhs
Over 10 years, a CAGR of 15% will offer Rs 1.4 lakhs
Over 10 years, a CAGR of 18% will offer Rs 1.7 lakhs
Over 20 years, a CAGR of 12% will offer Rs 5 lakhs
Over 20 years, a CAGR of 15% will offer Rs 7.6 lakhs
Over 20 years, a CAGR of 18% will offer Rs 11.7 lakhs
Over 30 years, a CAGR of 12% will offer Rs 17.6 lakhs
Over 30 years, a CAGR of 15% will offer Rs 35 lakhs
Over 30 years, a CAGR of 18% will offer Rs 71.6 lakhs
Let us look at the illustrations which offer a CAGR of 12% across 10, 20, and 30 years.
Over 10 years, the investment of Rs 500 per month turns out to be worth Rs 1.2 lakh.
Over 20 years, it balloons up to Rs 5 lakhs, and over 30 years it swells up to Rs 17.6 lakhs!
We don’t lose our sleep
Over a shorter period markets tend to be volatile. Even after investing consecutively for 36 months, one may see that one’s portfolio is in red. If the invested amount is small, then a new investor can deal with this situation and not feel stressed about it.
If a new investor starts a SIP with a larger amount in a small-cap fund during a choppy market, the variance in a portfolio can cause the investor to chicken out and withdraw his holdings much before the magic of rupee cost averaging plays out
As the performance of a mutual fund in which an investor has started a small SIP improves, she acquires confidence to invest higher amounts.
Suitable for risk-averse investors
Some individuals only prefer saving in fixed income or debt instruments. Due to certain reasons, such investors prefer the security of lower returns rather than the opportunity presented by equity funds to beat inflation.
If they haven’t tasted the growth that an equity-based instrument brings in, introducing them to the same through small SIPs is a great idea.
Some investors may not stay through the course even though the monthly invested amount is tiny. Whereas some may realize the benefits of investing in equity-based instruments as well and may seek to increase the SIP amount.
Continue to invest in case of unforeseen circumstances
As the size of an investor’s portfolio increases, her confidence in the wealth-creating ability of mutual funds increases.
After experiencing market volatility and continuing investments regularly, the investor begins to appreciate the process of creating wealth by investing through small SIP when the mutual fund portfolio starts growing.
This offers a huge boost of confidence to the investor which may result in the investor bumping up her SIPs.
Acquire confidence to invest more over some time as our portfolio grows
We live in an uncertain world. Incomes have improved but job security, especially in private firms, is a big question mark. There may also be health-related situations that may cause an individual to stop working for a while.
We are also living in a time when individuals wish to make the most out of their lives. This includes taking a sabbatical to travel or quitting a well-paying job to start up.
During such scenarios, one may not receive a regular flow of income. Or the size of income could reduce. Small SIPs can still be kept going as they may not cause a huge dent in an investor’s pocket during such uncertain times.
Easier to develop the habit of financial discipline
Financial discipline is rarely something we are born with. We have to work on it. Let us take the example of goal-based investing. A newbie investor may start a small SIP to invest a certain amount over 5 years to achieve a goal.
However, after 18 months, this individual may be tempted to buy a new laptop and would be falling short of some amount.
If this individual decides to redeem the corpus which has been created so far, he may not only lose the opportunity of creating more wealth but would also fall back on his efforts to achieve his goal.
Therefore it is critical to adhere to financial discipline when it comes to investing. Starting small makes it easier to get used to this. It is worth creating a habit of putting aside a small amount.
Over some time, this would make it easier to deal with following a discipline of investing larger amounts.
Claim tax benefits
Investors who are starting their journey in the world of investment can look at ELSS to not only help achieve financial goals but also save tax. ELSS stands for Equity Linked Savings Schemes.
ELSS is riskier than the fixed income alternatives available for tax-saving under section 80C but has the shortest lock-in period among all these options. It also offers the potential for growth via equity.
Conclusion
Rome wasn’t built in a day. And neither is a huge corpus that can offer financial freedom. One can begin investing modestly and then slowly keep increasing SIPs without being influenced by noise.
Once an investor signs up to ride several market cycles then there is no looking back.
This is because the investor begins to understand the importance of continuously investing during good times as well as bad. Small SIPs are bound to do wonders for our financial health.
