Knowledge Series 1 - SIPs : The Basix of Investments

Hi,

Good Morning!

I have noticed that there is quite a good awareness about Term Plans yet people are concerned about getting the money back.
My previous post should have cleared all your doubts and must have created a significant interest for Term Plans.

Today we will move ahead with our third important ingredient of Financial Planning :  SIP – Systematic Investment Plan.

An SIP – Systematic Investment Plan is any investment made systematically via month on month basis for a long term. This investment serves as a key ingredient of financial planning and helps us accumulate wealth through our monthly savings. The future value is supposed to yield us quite handsome returns. 

An SIP can be classified in two types on the basis of risk:

1) Market linked: Any SIP made in an instrument that invests into stock market is risk oriented and may yield you quite handsomely depending on the market performance. This can be done via Mutual Funds and Unit Linked Insurance Plans.

2) Non market linked: Any SIP made in an instrument that does not invest into stock market and tends to provide limited but safe returns without any risk. This can be done via a Recurring Deposit at a Bank or a Post Office or an Endowment Insurance Plan in monthly mode. Returns are same but an Endowment Insurance Plan gives more benefits like tax saving, insurance cover and Tax-free returns at the end of the term.

The benefits of each kind of SIP is as per the risk profile of the investment made.
For example, investing in high risk instruments like equity shall yield you multifold and on the same side carries similar amount of downside risk also.
But if an average return of 15% per annum is considered, an investment of Rs. 5000/- per month (Annually Rs. 60,000/-) for 20 years (total amount invested is Rs. 12 lac) yields Rs. 75,79,775/-.

That’s a multifold yield, isn’t it?

Similarly, a Non market linked SIP shall yield at around 8% per annum, and the amount comes out to be Rs. 29,64,736/- in 20 years.
A little conservative, but good for those not interested in taking high risks.

Moreover, if it’s an insurance SIP, it’s a Triple Benefit scheme. You get tax exemption on investment made, you get insurance cover accordingly and finally, the returns are totally tax-free. Far better than a Recurring Deposit!

But one important thing to keep in mind is that, “Never put all your eggs in the same basket”.

So diversify your SIPs properly as per your risk taking capacity and always plan for long term investments.

If you are not sure about your risk taking capacity, contact me at gauravkabra@gmail.com to advise you for it.

Happy Investing!