Do you want to save money? All of us want to invest in instruments that we deem secure and flexible. But, the hardest part about saving and investing money is getting started. Even the financially wise sometimes find it difficult to determine simple plans to invest money and how to start saving in those plans to meet their financial goals.
In the latest episode of ICICI Prudential MF presents Smart Investor, An Investor Education Program, titled ‘Meet your life goals by starting a SIP’, Aniruddha Chaudhuri, Retail Sales Head at ICICI Prudential Mutual Fund, tells us about how Systematic Investment Plans, or SIPs and mutual funds are a great option for a first time investors who want to start their investment journeys.
Why SIPs, you would ask? These smart solutions help you stagger your investments in mutual funds schemes, which are well diversified and are professionally managed hence relatively less volatile than investing in direct stocks.
“I think the pandemic has taught us two lessons. First, the need to create an emergency corpus, and second to deploy savings in a manner which takes care of our financial goal or future financial requirements. Over the course of a decade and more, such investments will help create wealth and cash flow generation, which will enable you to work for your passion and not money. That’s financial freedom which should be the aim,” Chaudhuri said.
To be financially independent, it is important to assess your cash flow requirements in the future. As a country, over 50 per cent Indians don’t plan for their retirement and only think about it when they are closer to that age. The idea is to assess that cash flow requirement and adjust it for inflation. If you start early, you can think about the cash flow requirement and then plan how you can get it.
“Often investors think about timing the market, but the most important aspect is how long you remain invested in the market. Remember two rules – first, invest with a long-term view and second, do not forget rule number one. By adhering to these two rules, I believe most of the investors will achieve financial security. Every investor must map a financial goal to each investment and avoid investing only for return, as returns are just a derivative,” said Chaudhuri.
After setting a financial goal, the next question is which is the right time to invest. Chaudhari feels that the right time to invest was yesterday. Given the time spent in staying invested is paramount, it is important to start early. Be mindful of your cash flows and invest each month to the best of your ability. “My advice here is – invest first and then think about expenses, otherwise expenditure will always be more than your income,” he explained.
So, if you want to create wealth, make a goal and an investment every month in a systematic way for the long term towards that goal. One of the most effective tools in this journey is SIP. “SIP is a very powerful tool and is the easiest way to invest in a disciplined way for wealth creation. You can start with a very small amount and if you invest every month, two things happen. One, you inculcate a habit of savings and two over the long term, your investments will benefit from the power of compounding. In a SIP, you are averaging and benefitting out of market volatility in the long run, gaining along the journey,” he explained.
But how do you make the start? Chart out your financial goal(s). Assume a rate of return and accordingly back calculate, and you will arrive at the required SIP amount to be invested every month. You can start a SIP with as low as ₹500. You can have several financial goals, like marriage, your child’s education, retirement, emergency corpus and create an SIP for each goal.
Another positive aspect about SIP is flexibility. Here, the investor is free to opt for a day of their choice in a month when the money is debited from their bank account. Then, every month on the same day, that pre-defined amount will be debited and invested in a fund of your choice. In terms of the frequency of SIP, apart from monthly, an investor also has the option of weekly or daily SIPs too. As the earnings improve, you can even top-up your investment amount. But the most important aspect among all these is discipline.
“During the pandemic, many faced financial challenges, be it a salaried person or a business owner as cash flows were impacted. For such challenging times, mutual funds have a facility known as SIP Pause. Here, an investor can temporarily pause their SIP for a few months. As a result, there is ample flexibility be it from starting a SIP, changing the investment amount or having a pause option,” he said.
For investors who have children, their financial security is one of the primary goals, for which too one can utilise a SIP. “For starting an SIP for your child, the only thing which is required is that the SIP should be registered in the child’s name but the investment will be done by a guardian or parent. The advantage with this particular offering is that the investments made are locked in till the child turns 18 years of age. So, automatically the investment made enjoys the benefit of compounding, which comes with long term investing. Also, the child has access to a reasonable kitty to start his journey thereafter,” said Chaudhuri.
So, are SIPs a risk reduction measure or a return enhancement measure? “I think risk is the most important aspect here compared to return. SIP reduces the risk of market volatility on investments and nullifies the risk emanating from just waiting on the side lines hoping for a market correction rather than investing in a disciplined way, all the while allowing the market to benefit you with reasonable returns over the long run,” he further said.