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Create a goal-oriented SIP plan to ensure you achieve your investment objectives

Updated: Sep 11

Investment- In simple words to beat Inflation we invest to multiply some part of our income. This investment can be anything. Starting from giving a loan to a friend for establishing his/her business to investing in Mutual funds, everything which is done to get return more than the opportunity cost (The value of the next best alternative) is called investment.


How SIP is the buzz word and why is it so?

SIP- Systematic Investment plan is a periodic (weekly, monthly, quarterly, etc.) investment procedure in debt or equity Mutual funds to bring financial discipline and punctuality in daily

life.


You must be wondering how SIP can bring discipline and punctuality in my financial life?

Take SIP as your jogging or meditating or eating breakfast daily at a fixed routine. SIP is just another routine activity of witty investors. Yes, those who do SIP are the ones in the safest zone when it comes to the risk and they get close to 2-4 times more return than what a normal bank provides. We will see a comparison between the returns but first, we should understand what is goal-oriented SIP first.

“A goal is not always meant to be reached; it often serves simply as something to aim it.”- Bruce Lee

Goal-oriented SIP- Knowing own Investment persona, setting up goals accordingly, and investing in SIP likewise is called goal-oriented SIP.


There are simply no benefits of doing SIP without knowing your goal, your motives, or your wants.


Before diving into SIP and mutual funds, first, we should know what we are. Everybody is different; so, there is no comparison while investing. We repeat no comparison while investing because it's you who is going to get return as well as face loss/below-expectation return. So, we need to stand by ourselves even when we do 20% or 2% return.


Broadly there are three major categories of Investment personalities as follows.

  1. Conservative (3.5%-8.4%)

  2. Moderator (8.5%-12%)

  3. Risk lover (Beyond 12%)

Those percentages are the return range that defines a person in terms of investment.


“Return is directly proportional to risk”


(But no one will tell you that higher risk doesn’t ensure high return. You need to diversify the

risk. But in SIP Mutual funds you don’t need to do that. Your fund manager will do that as per the character of that mutual fund to ensure a safe return)


We will focus on this risk-return but first, understand why SIP mutual fund?


If you need more return than traditional bank savings, (mostly 3.5-4%, which absolutely everyone wants) you can invest in a SIP mutual fund without hesitation. We will portray it in simple words. In India, Inflation is an average of 4% every year. It means if you have 100 rupees in 2020 then the value of that money in 2021 is 96 rupees (Value will decrease by 4%). If you put the money in the bank or Post office for the say and it provides 4% on its savings account. Then in 2021 that 100 rupees will accumulate to 104 rupees. The value of that 104 will be 99.84 after inflation deduction. It means you are at a loss of 0.16 rupees per 100 rupees. So, we need at least a greater return in the future to beat inflation.


The following are some examples of banks, small finance banks, or other financial instruments with their savings bank's interest rate or return rate.


Banks-

  • SBI- 2.7%

  • HDFC-3-3.5%

  • ICICI- 3-3.5%

  • Axis- 3.5%

  • Citi- 3.26%

  • PNB- 3-3.25%

  • South Indian Bank- 2.35-4.60%

SFBs (Small finance Banks)-

  • ESAF Small Finance Bank- 4.7%

  • AU Small Finance Bank – 4-7%

  • Equitas Small Finance Bank - 3.5-7.5%

  • Jana Small Finance Bank - 4.5-7.5%

  • Ujjivan Small Finance Bank - 4-6.5%

Others

  • Government saving bonds- 7.75% (Taxable || 6 Year minimums)

  • PSU Bonds- 6.5% (Tax free || Up to 20 years)

  • PPF (Public provident fund)- 7.1%

  • EPF (Employee provident fund)- 8.5% (Can’t withdraw unless retirement or Leaving Job)

  • VPF (Voluntary provident fund)- 8.5%

Now that you see what type of return one can get in other financial investments now it's time to dive in Mutual funds in the equity market.


Equity mutual funds can be divided into four categories as follows.


1. Tax-free or ELSS (Equity linked Saving schemes)- The most popular tax-free saving mutual funds under Section 80C.


(For Capital Gains implications, click here).

Examples-

  • Axis long term equity direct plan (7.4% return in past 3 years)

  • Mirae asset tax saver fund direct plan (7.1% return in past 3 years)

  • Aditya Birla Sun Life tax relief 96 (3.8% return in past 3 years)


As per SEBI Guidelines, the next categories are mentioned below


2. Large Cap Mutual fund- Top 100 listed companies as per market capitalization belong to this category . This means that these types of mutual funds will consist of equity, majorly of those top 100 companies.


Examples-

  • Axis Bluechip Fund direct plan (10.7% return in past 3years)

  • Mirae Asset Large-cap fund direct plan (4.9% return in past 3years)


3. Mid Cap Mutual Fund- Top 101-250 listed companies as per market capitalization belong to this category . This means that these types of mutual funds will consist of equity, majorly of those top 101st to 250th listed companies.


Examples-

  • Axis Midcap Direct plan (9.9% return in past 3 years)

  • Invesco India Mid Cap fund (4.7% return in past 3 years)

  • DSP Midcap Direct plan (2.8% return in past 3 years)


4. Small-Cap Mutual Fund- Beyond 250th listed companies belong to this category. This means that these types of mutual funds will consist of equity, majorly from 251st ranked company, and onwards listed companies.


Examples-

  • SBI Small-cap Fund (4.6% return in past 3 years)

  • Nippon India Small Cap fund (-1.8% return in past 3 years)

And here come the best categories for the moderate risk-taker. So, this is the best suitable category to invest in.


5. Multicap Mutual Fund- All types of listed companies’ equity fall into this category. It’s up to the fund manager who decides to diversify the fund. But here your risk gets averaged out, so one will get decent returns all the time even if the market fluctuates more.


Example-

  • Parag Parikh Long term equity fund (11.6% return in past 3 years)

  • UTI Equity fund (6.3% return in past 3 years)

  • Edelweiss Multi-Cap fund (3.3% return in past 3 years)

Enough of these classifications. One will understand the risk and return relationship by comparing all the categories. The following table will give a detailed idea.

The following are the best players in the market in their segment based on their past performance and their ability to outperform the market in the last few years. Choose one as per the category.

  • Tax saving fund - Aditya Birla Tax relief 96 fund

  • Large-cap fund - Axis blue-chip fund

  • Mid-cap fund - Axis Midcap fund

  • Small-cap fund - Axis small-cap fund

  • Multi cap fund - Parag Parikh long term fund

The following table will give a brief idea about the return of these best funds of the respective category along with Recurring Deposit of SBI.

Now that we have a brief idea about equity mutual funds, now we can understand Debt

Mutual Funds.


Debt Mutual fund- In this type of fund one will find that the majority of the funds are associated with fixed instruments like Government, Corporate, PSU bonds, and securities. It’s the most stable and ideal mutual fund for investors like middle-class people who are majorly risk-averse.


Examples

  • Kotak Dynamic Bond Fund (10% return in past 3years)

  • IDBI Liquid Fund (6.8% return in past 3years)

  • Axis Bank & PSU Debt Fund (9.7% return in past 3years)

The following table portrays the comparison of Debt and Equity Mutual Fund.

Coming to another bigger question why SIP, not Lump Sum investment? Well, we don’t get windfall gains all the time.


Invest a lump sum amount when you have a large bonus, inherited money, sold a property, or any type of bulk amount. But these occur once in a blue moon.


In SIP, we can start from 500 rupees and invest from our monthly savings. It will create savings and investment habits. We can invest lumpsum along with SIP for a better return. For this, there are two types of categories. By examining the categories, one can know their type and invest accordingly.


Category - 1: This category consists of people with fewer ideas and less time to be updated about the market.


How to Invest: Lumpsum in debt fund for a short term. Then one can invest slowly in equity funds for the long term along with SIP for long term funds.


Category - 2: This category consists of people who have time to be updated about the market and have a basic understanding of micro and macro concepts of economics.


How to Invest: First accumulate all the SIP in Debt Mutual funds then invest in equity funds when the market is at the bottom.


"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett

Invest when the market is bearish and get out of the bull market. Looking at the current pandemic situation; this time seems the best to invest in.


[Should Know - Bearish market- When the market is slow, falling down, sluggish or it has less money to invest. Bull Market- When the market is high, growing up, more number of passionate investors are available].


Invest parallel to your goals and persona.


Know yourself and better understand what you want to achieve. Map yourself to the appropriate Investment persona, discuss with an asset manager if possible. Take that much risk which you can digest and never put feelings while investing. It's you who will be getting the return at the end. So, you have to decide whether you want to celebrate with proper goal-oriented SIP (If at all you are choosing SIP) or you just want to be a victim of financial illiteracy and unawareness.


Author: Pradipta Baliarsingh.


Disclaimer: This article should not be construed as investment advice by Galactic Advisors

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