ACCORDING TO FINANCIAL PLANNERS, ONE NEEDS TO KEEP SEPARATE FINANCIAL GOALS TO ADDRESS DIFFERENT FINANCIAL NEEDS AT VARIOUS STAGES OF LIFE.
Systematic Investment Plans (SIPs) are one of the best financial innovations for investors with regular income. It inculcates in an investor a disciplined approach to investing, helps in rupee-cost averaging, assists one to take advantage of compounding if the SIP is run for a long period of time and the liberty to invest even small amounts of money.
Some of the main tenets of Life Stage Planning are to start investing early, invest regularly and in a disciplined manner. Along with these, it's also necessary to save in a smart way. Of late SIPs have emerged to be one of the smartest ways for retail investors to invest and create wealth. For a long time most of the people within the salaried class, who are generally the risk-averse types, kept their money in fixed deposits, that barely created wealth for them since by its very nature FDs hardly beat the rate of inflation. Along with the popularity of SIPs, the advancement of technology in the banking and financial services space has also made it easier for salaried people to invest regularly through the SIP route. At present, some of the fund houses even offer the option to start investing through the SIP route using the online channel and without any paperwork.
When SIPs were launched in India, most fund houses pushed this method of investing in equity funds. So most people who are new to investing or are starting to invest, believe that SIPs are possible only for equity schemes. However, the reality is that SIP is possible in almost all types of mutual fund schemes equity, debt, money market and liquid funds, gold ETFs etc.
According to financial planners, to address the financial needs at every stage of life, one needs to address those needs separately. Depending on the choice and needs of an individual, these stages could include getting married, buying a house, children's education (primary, secondary and higher levels), vacations, children's marriage, retirement of the self and emergency funds. For each stage of the life, one can set up an SIP in an appropriate type of mutual fund scheme and make his money work better for reaching these goals.
Here the basic rule of setting up an SIP is to look at the time left to reach the respective goal. If the time left to reach a particular goal is say a few months to a few years, that is about 2-3 years, this is classified as a short term goal. Paying children's school fees, insurance premium, short vacations etc. could be categorised into such short term goals. For such goals starting an SIP in a debt fund or a liquid fund is the ideal way to go.
For goals which are say between four year to six years or so, such goals could be categorised as medium term goals. For example one is planning a foreign vacation after five years from now. Or one's child is set to go for higher studies in about four years from now. For these goals one could set up an SIP in a balanced fund.
The third category is the long term goals. These goals are say more than seven years in future.
Such goals could include building a retirement corpus, children's marriage etc. The thumb rule for meeting a long term financial goal is to set up an SIP in an equity scheme. However, financial advisors and planners in India suggest that for children's marriage, in addition to starting an SIP in an equity scheme, one should also start an SIP in a Gold exchange traded fund. This second SIP is to meet the Indian custom in which gold plays an important role in all marriages.
According to financial planners, individuals and corporates can also use SIPs in debt and liquid funds to save on taxes. For this, however, a proper planning is required, keeping in mind the tax structure relating to debt funds. There are some words of caution here. Before starting an SIP, one should have a financial risk profile in place, financial advisors say. An investor should not go blindly with any SIP. Also there should be proper assessment of the investor's need for starting an SIP and suitability of the scheme in which the SIP is to be started.
Also before starting an SIP, it is necessary that one should know how much fund is needed for a particular goal in life. Keeping that in mind, one should decide on a realistic level of returns and then decide how much money he should invest in each SIP
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