7 MinsOct 09, 2020
Most of you would be able to list down your financial goals with ease. Most of you would also be able to list down how much you invest monthly. But would you know if your investments are aligned with your goal?
Say you are investing through Systematic Investment Plans (SIPs) in a mix of equity and debt mutual funds. Do you know from which fund to redeem for a foreign vacation that you are planning after three years and which investment has to continue
till the time your daughter needs funds for her higher studies after 10 years?
It is important that you align the SIPs to the envisioned financial goals, rather than investing in an ad hoc manner. If not, your investments may not serve the intended purpose.
There are several benefits of investing in Mutual Funds through SIP:
- You can invest in small amounts as per your ability.
- It helps instil the habit of investing regularly.
- You don’t have to worry about timing the market or about market volatility because the investment happens at different price points on a pre-defined date.
- You gain from compounding because each instalment gets added to the previous instalment and returns are generated on a larger base each time.
These benefits can be amplified if you align the SIPs to your respective financial goals. Here are 3 steps to achieve it:
1. Invest the right amount
2. Choose the scheme sensibly
3. Follow the discipline
Invest the right amount – The first step is to calculate the SIP amount required to achieve the envisioned goal. There is a tendency to calculate the required amount based
on current cost or prices. But you must take into account the impact of inflation. You may need a higher amount to achieve the same goal a few years down the line. Hence, the right way is to calculate the future value of the goal by taking
into consideration: the current cost; the inflation rate; and the time-to-goal.
Once you have determined the corpus required (the future value), work backwards to compute the amount you need to invest starting today via a SIP to achieve the goal.
Say, you need money to address two financial goals:
(1) Foreign vacation after three years - You estimate you need about Rs 5 lakh. But since you are planning the vacation after three years, you have to take into account the cost at that time. As per your risk profile, either a
debt fund with the average maturity of the fund commensurate to the investment horizon or a hybrid fund would preferably be the right choice for this short-term goal.
(2) Child’s higher education after 10 years – Again, you estimate that for a post-graduate course in a reputed university about Rs 25 lakh is required. But remember, you need to look at how much it will cost after
10 years. As per you risk profile, a hybrid fund or an equity fund would preferably be the right choice for this long-term goal.
The table below shows how these goals can be achieved.
|Child's Higher Education
|Time-to-goal (in years)
|Present Value of the Goal (in Rs)
|Future Value (in Rs)
|Monthly SIP required to achieve the financial goal (in Rs)
|Inflation Rate (assumed on average basis)#
|Investment Rate* (compounded annualized)
*For the short-term goal, the assumed investment rate is that of a short-term debt fund and for the long-term goal that of a large-cap equity fund.
(Table above is for illustration purpose only)
Remember, the earlier you start a SIP, the better it is. With more time in hand, you can generate wealth better and accomplish financial goals comfortably (with smaller SIP amount).
Creating a list of financial goals is an important step in financial planning. Some other examples of goals could be:
Long term goal: Creating a retirement corpus, buying a house, child’s wedding, etc
Short term goal: buying a car, pre-payment of loan, creating an emergency fund, etc
Along with the tenure of the goals you would also need to look at other factors such as your income, liabilities, risk-appetite, etc, before selecting the mutual fund.
Choosing the scheme sensibly – If your risk profile is high, the investment objective is capital appreciation (over the long term), and the time horizon for your goals is more than 3 years, you may consider a SIP into hybrid
mutual fund schemes which invests in both equity and debt instruments or equity-oriented mutual fund schemes. Conversely, if your risk profile is low, you wish to earn stable returns by preserving capital as far possible, and/or address short-term
financial goals that are 3 years or less than 3 years away, you may look at debt-oriented mutual funds or a hybrid mutual fund.
Select the mutual fund scheme/s that meet your requirements best. You need to evaluate a host of quantitative and qualitative aspects of the respective scheme(s) under consideration, plus understand the investment philosophy, characteristics of
the underlying portfolio, performance across market phases (to check for consistency) and the ideologies of the mutual fund house.
If you wish to achieve the envisioned financial goals sooner and comfortably, consider increasing the SIP amount gradually, say annually. The benefits include:
- Ensures that your investment amount increases at the same rate as your income
- Helps you counter inflation better
- When you invest more, the returns are generated on a higher base every year, thereby helping your wealth to increase at a faster rate.
- Enables you to build a bigger corpus to achieve the financial goals faster and comfortably
Follow discipline – Don’t stop or discontinue your SIPs in volatile market conditions or corrections. If equity markets correct, enabled by the rupee-cost averaging feature, your SIPs will buy you more units and when
the markets move up, while the SIP instalments will buy fewer mutual fund units then, but the power of compounding will help accelerate the pace of wealth creation. So, you should focus on “time in the market” and not timing the
You may consider stopping SIPs in a mutual fund scheme only when:
- You achieve the desired corpus for the envisioned financial goal/s;
- There is a change in the fundamental attributes of the scheme;
- There is a change in your risk profile;
- The scheme has persistently underperformed; or
- Portfolio rebalancing warrants the decision
Select mutual fund schemes (or for that matter any other investment avenue) that are in congruence with your needs and align them to your financial goals.
[Also Read: How to minimize your mutual fund losses]
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision