7 minsMay 2, 2018
“If there must be trouble, let it be in my day so that my child may have peace." –– Thomas Pain
(An English-American philosopher, one of the founding fathers of the United States, political theorist, political activist, and revolutionary.)
This is what every parent wishes for.
Every parent wants to give their children the best future –– be it education or lifestyle.
But to fulfil these desires, prudent financial planning should be a priority.
There are galore of investment options today; but often, selecting an appropriate investment avenue is a perplexing and daunting task.
Moreover, you ought to take care of striking an asset allocation that’s best suited for you. And once you do that, reviewing it is equally critical as you progress towards the financial goals set for your children’s better future.
So, it is certainly not child’s play!
Simply, saving and investing in an ad-hoc manner may not help.
You will agree that…
- There's much more competition, peer pressure today on parents and children;
- The cost of education has increased;
- Overall cost of living has gone up;
Therefore, you need to:
- Have a holistic understanding of what you wish to provide your children
- Save regularly
- Account for inflation and counter it (to protect the purchasing power of hard-earned money)
- Invest in wealth creating, such as equity mutual funds –– preferable via Systematic Investment Plan (SIPs) by starting early to compound wealth better and mitigate risk
- Be focused and disciplined in your approach
- Optimally insure yourself as parent (both for life, health and property), to avoid a financial setback in case an untoward event were to happen to you
To put it simply, you need a roadmap followed by smart investment solutions to accomplish the envisioned financial goals so your dreams can come true.
And indeed, for every financial goal you address, a different portfolio is needed.
But one thing you need in common is: Systematic Investment Plans (SIPs).
SIPs, a mode of investing, facilitate systematic and regular manner in mutual funds. SIP-ping into mutual funds is a strategy for long-term wealth creation.
Plus, SIPs enforce discipline as your hard-earned money gets parked (debited from the bank account) either daily, monthly, quarterly in a respective mutual fund scheme.
Here are 5 benefits of SIPs:
- SIPs are lighter on the wallet
- SIPs facilitate you to invest in smaller amounts at regular intervals (daily, monthly or quarterly). This in turn reduces your burden of defraying a lumpsum at one go from your bank account.
- If you cannot invest Rs 50,000 in one shot, the SIP route enables investments to break down your investment daily, monthly, or quarterly, so that you invest comfortably regularly to accomplish your financial goals.
- SIPs make market timing irrelevant
- Timing the market can be hazardous to your wealth and health. Instead, focus on 'time in the market' in your endeavour to create wealth by selecting the best mutual fund schemes.
- Now one may ask, “If equities are such a great thing, why are so many investors complaining?”
- Well, it's because they either got their stock or the mutual fund wrong or the timing wrong.
These hiccups can be resolved by investing through SIPs in mutual fund schemes with a dependable track record and staying invested for the long-term. And if market volatility worries you, SIPs in fact can aid in managing (even-out)
that volatility and prove effective, particularly when markets are at high.
- Enables rupee-cost averaging
- Many a times, a SIP works better as opposed to investing a lumpsum one-time. This is because of rupee-cost averaging. Under rupee-cost averaging, you typically buy more units of a mutual fund scheme when prices are low, and buy fewer
mutual units when prices are high. This infuses good discipline because it forces you to commit cash when markets are going through a lull, when other investors are wary and exiting the market. It also enables you to lower the
average cost of your investments.
- Offers the benefit of power of compounding
- Along with the habit of investing regularly, SIPs power your investments with the benefit of compounding.
- For example, a monthly SIP of Rs 1,000, in a mutual fund scheme with an appealing track record following robust investment processes & systems can aid you build a corpus of approximately Rs 9.99 lakh over a 20 years investment
horizon with a modest 12% annualized growth rate in equities.
- And if the equity market performs better, the corpus can be even larger, provided the fund selection is apt.
- So, over the long-term, SIPs can compound wealth productively and systematically as opposed to investing a lumpsum, especially when the journey of wealth creation is volatile.
- SIPs are an effective medium of goal planning
- When you are planning for your children’s future goals, i.e. their education and marriage needs, SIPs prove effective if you start early, invest in the right mutual fund schemes, and have a long-term investment time horizon.
- Note that SIP-ping into mutual funds is exposed to market risk.
When do SIPs work?
SIPs work the best during longer bear phases (of 3 years), as it lowers your average cost. Had you invested a lumpsum in a bear market, you would lose money. But in such conditions (bear market) SIPs outperform one-time investments hands down.
Similarly, even in flat or volatile market conditions before the market trends up, SIPs are good. The ‘rupee-cost averaging’ feature, enables mitigate volatility; but you ought to have a longer investment time horizon to reap the sweet
However, amid a market rally or a bull phase, SIPs might not work efficiently; because your investment instalments could get triggered on SIP date(s) at higher NAVs. Meaning, you would be purchasing units of mutual fund scheme(s) at a higher
price, making your average purchase cost higher than the initial NAV of the first instalment (or the lumpsum investment), thereby impacting SIP returns.
Having said that, in times of market euphoria, SIP-ping into mutual funds would be indisputably prudent than going gung-ho and investing a lumpsum.
Which are the best SIPs?
Well, there’s nothing like the ‘best SIPs’. As mentioned earlier, SIPs are just a mode of investing in mutual funds.
To select winning or best mutual funds schemes you need to evaluate:
- Overall performance by…
- Doing a peer comparison
- Gauging returns across time period and market phases
- Recognising risk exposure of the fund
- Considering the risk-adjusted returns clocked
- Assessing the portfolio characteristics
- Pay attention to the cost involved (expense ratio and exit load)
- Forming a view on the fund management team (mainly looking who is the fund sponsor; investment philosophy, processes & systems followed at the fund house, experience of the fund management team)
- The tax implications of a particular mutual fund scheme
Star-rated funds may be a good starting point to identifying a broader set of investment-worthy funds. But solely going by the number of stars against its name may not be the right.
When it comes to investing, there is no such thing as a one-size-fits-all portfolio.” – Barry Ritholtz (An American author, newspaper columnist, and equity analyst)
Remember, star ratings subscribe to a 'one size fits all' approach.
A fund could be right for one investor and (despite its sterling performance) be completely unsuitable for another. Therefore, do not attempt to replicate or mimic the investment portfolio allocation or investment strategy of your friends, colleagues,
neighbours, and/or family members.
For your child’s future needs––be it education and/or marriage –––an investment portfolio, essentially, should be crafted with due respect to the investment objective, investment horizon, and asset allocation.
Select mutual fund schemes (or for that matter any other investment avenue) that are in congruence to your needs.
Financial planning and investing are highly personalised activities. If you are unsure or lack the expertise to pick the best mutual fund schemes to SIP and plan for you financial goals, do reach out to a SEBI registered investment adviser or Axis bank’s wealth manager.
Their holistic approach, superlative guidance, and handholding can help you plan a bright future for your children.
Start saving and investing prudently for your children’s bright future from today itself! The earlier you make a start, the better it is.
Also, as a parent, make it a conscious effort to make your child money-wise. Help them understand the value of hard earned money, which in turn can prove empowering when they manage their own personal finances as they turn adults.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. 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.