SIP – A Way of Investment For Achieving Your Financial Goal
I remember it was a hot May morning in the year 2005 when I first landed at Guwahati to join the regional office of an MNC. I had 5 years of experience in financial services and had spent last three years with this same company at its Bangalore location. It was during these initial days at Guwahati when I met Mr Nirmal Kumar for the first time. Nirmal was transferred from Patna to Guwahati to look after another division for the North East region.
And eventually as time past by, I and Nirmal became best of friends and colleagues. When it comes to personal finance, I gained Nirmal’s trust for every important financial matter in his life.
Nirmal was earning a salary of around Rs. 25,000 per month. His expenses included the rented accommodation, food and few other incidental monthly expenses. Besides he also pays Rs. 2000 every month as ECS premium payment for his LIC policy and some Rs.3000 he sends every month towards his sister’s education expenses. In a way, he was saving approximately Rs. 9000 every month.
I suggested him to start investing in Indian Equity Market.
He asked: “How to start investing?” and “How it is different from bank deposits”, and above all his scepticism – ” Is it Safe to put money ?”
How to invest in Mutual Funds?
“The easiest and simplest way to invest in Indian equity market is putting your investable surplus into a Mutual Funds Scheme. You can either put a Lump-Sum/One-Time investment amount, which can starts as low as Rs.5000; Or, a monthly regular investment through ECS or post-dated cheques, where a fixed amount gets invested on a particular schedule date every month. This mode of investment in Mutual Fund is popularly known as SIP – Systematic Investment Plan”
“The difference is that when you are invested in equity markets, via Mutual Funds, you have the chances to earn much higher returns than a nominal bank deposit, provided you stay invested for long-term.”
That month, Nirmal started investing in two different Mutual Funds Schemes: First with an ELSS Scheme – Equity Linked Saving Scheme, also known as Tax Saving Mutual Fund with an amount of Rs.3000 per month, which is a SIP, ie Systematic Investment Plan; and Second investment – a lump sum amount of Rs. 25,000 into an Equity Balanced Scheme of a Mutual Funds. The ELSS would help him in tax planning for each financial year he is investing in.
After two years, Nirmal planned to buy a motorcycle, and I suggested him to check the status of his mutual fund’s investments. Fund #1 was giving him a return of around 15 % CAGR*; However, as this is ELSS Fund – or a “Tax Saving Mutual Fund” it has a lock-in period of 3 years for the invested amount, and one can only withdraw only after the lock-in period.
But his #2 Mutual Fund investment has given him approximately 25% returns! – with valuations close to Rs. 41,000, thanks to rising stock market during the period of 2007.
Nirmal had an amazing first-time experience with his mutual fund’s investments. I suggested him to redeem his #2 mutual fund worth Rs. 41,000 . He added some Rs.7,500 to the redeemed amount and bought a 125cc motorcycle.
It is an accomplishment of some order to enjoy life with one’s own money. Nirmal was happy to do away with a bank loan, which is borrowed money with periodic interest payments, however small it may be.
Success in successive years comes with rising salary, and his #3 mutual fund investment was into a SIP of Rs. 7,500 per month, which he earmarked to buy a car after 2 to 3 years, and he plans to pay the initial down-payment with this fund investment value.
I suggested Nirmal to further plan investments for his life’s small and big goals.
So just like a good student, he started to plan for his marriage and started a SIP of Rs. 5000 /- per month earmarked exclusively to part-finance his marriage in near future
Few years down the line, Nirmal got married and he could efficiently manage his part of contributions towards his marriage expenditures. He even set aside an amount for his honeymoon trip to the Ooty – the popular hill station located in the Nilgiri Hills along with a visit to Coorg!
SIP can help you achieve your life’s important Financial Goals
As time went by, so also Nirmal’s maturity in understanding the fruitful of his prudent investments decisions. By now, he has made the habit of earmarking a SIP to a specific goal in his life. Some of his life’s major financial goals include buying a house/flats and to grow and build a fat retirement corpus fund.
One evening Nirmal visited my home, and I popped the obvious ‘family question’ – “When are you planning to have a baby?”
As we discussed the expenses that come with the responsibility of bringing up a child, Nirmal rightly pointed that other things set aside, even cost of the diaper for the child would be around Rs. 4500 per month. I suggested him to initiate the financial plan well in advance.
The outcome of our discussion has lead to some beautiful financial decisions that have a positive impact on one’s life. Nirmal planned to have a baby after 2 years. But most importantly, I persuaded him to start another SIP of Rs. 3000 per month in a balanced category equity scheme, so that after the birth of his first child, he could make an SWP of approximately Rs. 4500 which would cover the monthly costs of the diaper for the future child!
SWP – Systematic Withdrawl Plan is monthly/periodic mode of withdrawal from mutual fund scheme.
* CAGR – Compounded Annual Growth Rate
[ Nirmal is a classic example of a prudent investor, who planned for each and every important life’s event and attach it to a financial goal; And to achieve the financial goal, he takes recourse to SIP – Systematic Investment Plan offered by Mutual Fund Schemes ]