According to the most recent SEBI data, a rising percentage of Indian investors are using SIPs to invest in mutual funds. While a disciplined investing approach may make a substantial contribution to wealth growth, it is critical to carefully plan investments and avoid rash selections over a certain time period. Here are a few factors that must be managed properly to make your SIPs more effective:
- Consider inflation while planning long-term goals. Long-term goals such as retirement preparation and schooling for your children would necessitate the accumulation of a sizable sum of money. As a result, you must select a target for each of these after accounting for the effect of inflation, and calculate the investment amount using an estimated annualised rate of return from the mix of assets determined for that target. For instance, if the parents of a newborn kid begin preparing for the kid’s higher education today, with education inflation at 12%, the present education cost of 20 lakhs will rise to 1.54 crore after 18 years. To reach this goal, they will need to invest Rs. 21,000 per month in equity funds through SIPs. As you can see, starting your long-term investing strategy without factoring inflation might result in a significant difference between what you can obtain and what is necessary for that financial objective.
- Increase your SIP amount annually as your income increases. This is called step-up investing. There are proven benefits to commencing investing through SIPs early, such as taking advantage of the power of compounding and realizing the full potential of an asset class like equities. However, it is crucial to note that even your well calculated target amount will need to be modified when your income increases over time. As a result, you must increase your SIP amount in order to retain discipline in your savings and investing processes while still meeting the revised goal. Being consistent in this approach can have a significant impact on what you end up accumulating over time. For example, if you invest Rs.10,000 each month in equity mutual funds, you might expect to accumulate a corpus of around 1 crore after 20 years, assuming an annualized return of 12%. However, if you increase your SIP amount by 10% each year, you may anticipate accumulating a corpus of around 2 crore after the same time period.
- Stay focused on your investment process during market instability. While equity as an asset class allows you to generate a positive real rate of return (gross returns minus inflation minus taxes), periods of market fluctuation can put your patience and tenacity to the test. Having a clear time frame, suitable asset allocation, and staying focused on your goals will help you navigate the stock market’s turmoil. In other words, if you begin your investing process without first planning your investments, you will struggle to stay involved in the face of market volatility. Needless to mention, quitting your investing plan or suddenly altering your asset allocation might expose your financial stability to the risks of adverse movements.
- Don’t invest in many funds. Investors frequently invest little sums in several funds, resulting in unmanageable portfolios. Needless to say, a scenario like this is more detrimental to your portfolio than beneficial, since it might suffer from duplication, overlap and underachievement If you carefully select your funds for each of your objectives, a few funds can provide appropriate diversity in terms of sector and stock allocation, as well as segment-specific allocation.
