My son wants to create an SIP of Rs.20K monthly for 20 years for Infosys and ITC each. How much wealth can he expected to create by this action at the end of 20th year. Is it a wise approach for weath creation.

Ans: These funds can be considered

1. Axis ESG Equity Fund (Growth)
2. Parag Parikh Flexi Cap Fund (Growth)
3. SBI Magnum Global Fund (Growth)
4. DSP Focus Fund (Growth)
5. ICICI Prudential US Bluechip Equity Fund (Growth)

 

Ans: Investing only in just 2 stocks may not be the right approach. Need to have reasonable diversification.

Ans: Whether a SIP of Rs 2,000 per month for 20 years with top-ups can help you earn Rs 40 lakh depends on the rate of return you achieve. Here's a breakdown:
Investment plan:
• Monthly SIP: Rs 2,000
• Investment period: 20 years (240 months)

Top-up SIP:
• Rs 1,000 annually
• Rs 2,000 after 3 years (one-time)

Possible returns:

It's impossible to predict future returns with certainty, but here's an estimate based on historical averages:

• Equity mutual funds: Historically, equity mutual funds in India have delivered average annual returns of around 12-15%. With this rate, you could reach Rs 40 lakh in approximately 15-17 years.
• Debt mutual funds: Debt funds offer lower returns but are less volatile. They typically yield 6-8% annually. At this rate, reaching Rs 40 lakh would take much longer, possibly exceeding 20 years.

Reaching Rs 40 lakh:

Based on the above, a return of at least 8% would be necessary to reach Rs 40 lakh within 20 years with your investment plan. Remember, this is just an estimate, and actual returns may vary significantly.

Using a SIP calculator:

For a more precise estimate, consider using a SIP calculator that factors in your investment details and desired return rate. Many online platforms offer such calculators.

Important factors to remember:

• Past performance is not indicative of future results. Mutual fund returns can fluctuate significantly depending on market conditions.
• Consider your risk tolerance. Equity funds offer higher potential returns but also carry greater risk. Choose a fund that aligns with your risk appetite.
• Seek professional advice. Consulting a financial advisor can help you create a personalised investment plan based on your goals and risk profile.

Ans: you have a commendable plan for starting a SIP of Rs. 5000 with a 50% step-up over a 20-year horizon. This strategy, paired with an estimated 12% average return, can accumulate significant wealth. Let’s delve into the details step by step.

Understanding SIP and its Advantages
Systematic Investment Plan (SIP) is a disciplined investment method where you invest a fixed amount regularly, irrespective of market conditions. It helps in averaging the cost of investment and instilling a habit of regular saving.

Advantages of SIP:

Discipline in Savings: SIP enforces regular saving, which is essential for wealth accumulation.
Rupee Cost Averaging: It averages out the purchase cost, mitigating the impact of market volatility.
Power of Compounding: Over time, the returns on your investments start earning, leading to exponential growth.
Flexibility: SIPs offer flexibility in terms of investment amount and tenure.
Convenience: Automatic deductions make it hassle-free.
Concept of Step-Up SIP
A step-up SIP allows you to increase your SIP amount annually. Your plan to start with Rs. 5000 and step it up by 50% annually is strategic. This approach leverages the increase in your income and enhances your investment portfolio significantly over time.

Benefits of Step-Up SIP:

Enhanced Savings: Regularly increasing the SIP amount boosts your savings without a significant impact on your lifestyle.
Inflation Hedge: Helps in combating inflation as your investments grow at a faster pace.
Goal Alignment: Helps in reaching financial goals quicker by systematically increasing contributions.
Mutual Fund Categories
**1. Equity Funds:
These funds invest primarily in stocks. They offer high growth potential but come with higher risks.

**2. Debt Funds:
These invest in fixed-income securities like bonds and treasury bills. They are safer but offer lower returns compared to equity funds.

**3. Hybrid Funds:
These funds invest in a mix of equity and debt instruments, providing a balanced approach to risk and return.

Advantages of Mutual Funds
Professional Management: Managed by experienced fund managers who make informed investment decisions.
Diversification: Mutual funds invest in a variety of securities, reducing overall risk.
Liquidity: Mutual funds can be easily bought or sold, providing liquidity to investors.
Accessibility: You can start investing with a small amount, making it accessible for all income groups.
Risk Factors in Mutual Funds
Market Risk: Equity funds are subject to market fluctuations.
Interest Rate Risk: Debt funds are affected by changes in interest rates.
Credit Risk: The risk of default by the issuers of the debt securities.
Inflation Risk: Returns may not always keep up with inflation, particularly in conservative funds.
Power of Compounding
Compounding is the process where your investment earnings are reinvested to generate additional earnings over time. In the context of mutual funds, reinvesting dividends and capital gains leads to exponential growth of your investment.

Example:

If you invest Rs. 5000 monthly with a 12% annual return, the power of compounding significantly boosts your wealth accumulation.
Estimating Wealth Accumulation
Starting with Rs. 5000 and stepping it up by 50% annually can lead to substantial wealth. Over a 20-year horizon, with an assumed return of 12%, you can accumulate a sizeable corpus. The compounded returns, along with the increased contributions, play a pivotal role in wealth creation.

Actively Managed Funds vs. Index Funds
Disadvantages of Index Funds:

Limited Growth: They track a market index, offering limited growth potential.
No Active Management: Lack of active management means missed opportunities in volatile markets.
Market Dependency: Their performance is entirely dependent on the market index.
Benefits of Actively Managed Funds:

Professional Expertise: Managed by experienced fund managers who aim to outperform the market.
Flexibility: Can adapt to changing market conditions and take advantage of market opportunities.
Potential for Higher Returns: Aim to provide higher returns than index funds through strategic investments.
Regular Funds vs. Direct Funds
Disadvantages of Direct Funds:

Lack of Guidance: No access to professional advice, making it difficult for novice investors.
Time-Consuming: Requires more time and effort to manage and monitor investments.
Higher Risk: Without professional advice, the risk of making poor investment choices increases.
Benefits of Regular Funds through MFD with CFP Credential:

Expert Advice: Access to a Certified Financial Planner for professional guidance.
Convenience: Easier to manage with the support of a financial expert.
Personalized Planning: Tailored investment strategies based on individual goals and risk tolerance.
Investment Strategy and Financial Goals
Your plan of starting a SIP with a step-up strategy is excellent. Aligning this with your financial goals will ensure you are on the right path to achieving them.

Short-Term Goals:

Emergency Fund: Ensure you have sufficient liquidity for unexpected expenses.
Short-Term Purchases: Plan for upcoming expenses like vacations, gadgets, or home renovations.
Long-Term Goals:

Retirement Planning: Accumulating a significant corpus for a comfortable retirement.
Children's Education: Ensuring funds for higher education without financial strain.
Wealth Creation: Building wealth for future security and lifestyle enhancement.
Risk Assessment and Management
Understanding your risk tolerance is crucial. Since SIPs in equity funds involve market risks, assessing your risk appetite helps in choosing the right funds. Diversifying your investments across various asset classes can mitigate risks.

Risk Management Strategies:

Diversification: Spread investments across different asset classes and sectors.
Regular Review: Periodically review your portfolio to ensure it aligns with your goals.
Rebalancing: Adjust your portfolio based on market conditions and changing goals.
Importance of Financial Planning
A Certified Financial Planner (CFP) can provide valuable insights and help in strategizing your investments. Their expertise ensures your financial plan is comprehensive and aligned with your long-term objectives.

Benefits of Consulting a CFP:

Holistic Planning: Covers all aspects of financial planning, including investments, insurance, tax planning, and retirement.
Objective Advice: Provides unbiased recommendations based on your financial situation.
Customized Solutions: Tailored investment strategies to meet your unique financial goals.
Final Insights
Starting a SIP of Rs. 5000 with a 50% step-up is a smart strategy. Over a 20-year horizon, with an estimated 12% return, it can accumulate substantial wealth. The power of compounding, combined with disciplined investing and regular step-ups, will significantly boost your financial growth. Leveraging the expertise of a Certified Financial Planner ensures your investments are well-managed and aligned with your goals. This holistic approach, with a focus on diversified and actively managed mutual funds, sets the stage for achieving your financial aspirations.

Investing in mutual funds through SIPs, understanding the advantages, risks, and benefits of professional management, and aligning them with your goals ensures a robust financial future. Stay disciplined, review your portfolio regularly, and make informed decisions to maximize your wealth accumulation journey.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in