In today’s fast-paced world, change is the only constant. In the face of mounting uncertainty and the ever-evolving economic landscape, fulfilling long-term financial objectives has become a primary concern for most investors. Our aspirations extend to securing top-tier education, enhancing our quality of life, and providing a comfortable lifestyle for ourselves and our children. Consequently, our financial needs must align with these ambitions.
The days when individuals could amass wealth and maintain a decent lifestyle solely through traditional investment options with high guaranteed interest rates are long gone. As the economy matures and fixed-income product interest rates dwindle, this path is no longer viable. The 25-year average one-year rolling inflation rate stands at 5.55%, while returns from fixed deposits during the same period amount to 7.19% (RBI, 2023). Consequently, pre-tax real returns barely surpass inflation, failing to create substantial wealth when considering the tax implications.
Now, let’s shift our focus to equity as an asset class. Between April 1982 and March 2023, the 10-year average rolling returns of the BSE Sensex averaged 14.93%, with the chance of incurring a negative return being just 1 in 32 observations. Historical data consistently demonstrates that equity outperforms all other asset classes, becoming less volatile and risky with longer holding periods. It is now the cornerstone of wealth creation. Our parents may have had valid reasons for not investing in equities during their time, but we do not. The greater risk lies in not taking calculated risks to build wealth, rather than merely seeking to safeguard one’s money. The question now arises: how do we invest in equities?
As you may have guessed, the answer lies in the ubiquitous equity mutual funds. Over the 25-year period ending March 2023, equity mutual funds have delivered an average return of 15.57%. They surpass other investment avenues due to the myriad advantages they offer, including professional management, diversification, convenience, and low costs in terms of expenses. They are an ideal fit for retail investors who lack the time, inclination, or expertise for direct equity investments. The next step, when investing for specific financial needs, is determining the necessary savings. There are two ways to do this: through lump-sum investments or through regular, systematic investments. Lump-sum investment is straightforward if you possess the required capital upfront. However, for many of us, committing to a defined future cash flow, such as a monthly investment, is more convenient.
Systematic Investment Plans (SIPs) come into play here. A SIP entails regularly subscribing a fixed investment amount to a mutual fund scheme, often on a monthly basis. SIPs offer a hassle-free method of investing in mutual funds, with funds automatically debited from your bank account each month. SIPs have witnessed a surge in popularity, with monthly contributions reaching Rs. 13,728 crores in April 2023 (AMFI). SIPs complete the investment loop for achieving long-term financial needs, making them a crucial aspect of this discussion.
Benefits that make SIPs in equity mutual funds the ideal route to fulfilling long-term financial needs:
Rupee Cost Averaging: SIPs enable you to invest a fixed amount at regular intervals, regardless of market valuations. This indirectly involves timing the market, as you buy more units when the market is down (lower NAV) and fewer when it’s up (higher NAV). This gradual approach averages out your overall investment cost, mitigating the impact of market volatility on your investments.
Discipline: SIPs instill discipline in investing. Committing to regular investments brings you closer to your financial needs with each contribution, often without requiring your active intervention. It cultivates a habit of consistent investing.
Avoiding Impulsive Decisions: Regular investing at all market levels reduces the likelihood of making impulsive decisions based on short-term market fluctuations. This behavior helps you evolve as an investor, fostering a balanced and rational investment strategy.
Mutual Fund Benefits: SIPs, being part of mutual funds, come with inherent advantages such as convenience, liquidity, diversification, professional fund management, and transparency. Additionally, investing in equity funds offers tax benefits. The entire investment process is now digitized, allowing new investors to register, open accounts, and set up SIPs from the comfort of their homes.
SIP Top-up: SIP Top-up is another compelling feature. It allows investors to periodically increase the SIP installment by a fixed amount. This flexibility helps you invest more over time, matching it with salary increases or savings, keeping your real SIP savings consistent or growing. Starting with a small SIP and gradually increasing it can be particularly appealing when planning for long-term financial needs.
Investing for financial needs
Dave Ramsey aptly noted that “financial planning is not just about numbers. It’s about setting goals, making informed decisions, and taking control of your financial future.” Planning involves bringing the future into the present to act on it effectively.
Without a financial plan, you may lack clarity on why you’re investing and where to invest. Start by defining your financial needs using the SMART acronym: Specific, Measurable, Achievable, Relevant, and Time-bound. Prioritize, schedule, and formulate a plan that aligns with your aspirations and financial capabilities.
Wealth accumulation entails stages such as asset allocation, risk profiling, and choosing suitable schemes to meet your needs. The abundance of schemes can be overwhelming, and this is where professional guidance becomes crucial. A mutual fund distributor can be your partner, helping you navigate the volatile markets, make rational decisions, avoid personal biases, and enhance your financial well-being while investing in mutual funds.
Your aspirations and responsibilities towards yourself and your family are not up for debate. They reflect your love and hope, whether they involve securing a dignified retirement, providing top-notch education for your child at a foreign university, or simply owning a comfortable home. Every dream, big or small, is significant and rational. To make these dreams a reality, several elements must align. Fortunately, the tide is in our favor, with India poised for robust economic growth in the coming decades. Seize this opportunity and employ the strategies discussed in this article to turn your dreams into reality.