Art of being Systematic now for more money later

Need more money later? Go the “systematic way”

Phrases like ‘financial discipline’, ‘systematic investments’ etc., are often met with a groan, a mental eye-roll or both. But being regular with your savings and investments can really turn the financial tide in your favour. It is possible to keep aside a few thousand monthly and ‘pocket’ lakhs later. Seriously!

Let’s begin with the right attitude and face some tough truths

Alright! Time for introspection. What is stopping you from investing?

“I have just started earning and I don’t have enough left to put into SIPs.”

“It’s difficult to manage SIPs along with my outstanding education loan.”

“I don’t think an amount that small would make much of a difference.”

 

Added to these are the countless dine-outs, pizza deliveries, online shopping sprees and the ever-mounting credit card bills.

It is not easy to acknowledge these impulses. When inflation shows no signs of slowing down and resources are limited, every rupee saved counts. So, it is important to mentally prepare yourselves to make regular investments.

Understanding mutual funds

One reason why investors shy away from mutual funds is their inherent risks. Yes, there are market risks involved and you do need to fine-comb the fine print to understand them. You need to choose carefully, based on your needs and various market metrics like past returns, performance across market cycles, ratings, fees etc.

It is not as complex as it sounds. You may also rely on advisors and distributors if you don’t want to spend money and time on research and market-timing. So, mutual funds are quite easy to get into and build on. All you have to do is invest intelligently and have a systematic approach towards your investment goal(s).

Art of systematizing your investments

There are two ways to make a mutual fund investment – by making a one-time lump sum investment or through a Systematic Investment Plan (SIP). If you can afford to invest a bulk amount in one go, lump sum can work. But it is not always possible when one leads a paycheck-to-paycheck life. In that case, SIPs are affordable and practical as you only have to put a small amount that you can spare every month in a disciplined manner.

Some mutual fund companies also offer daily, weekly, bi-weekly, fortnightly and quarterly SIPs. You can take your pick from any of these options. However, monthly SIPs – set to auto-debit on a fixed date – work best to help you inculcate financial discipline and build a substantial corpus.  

Systematic strategies like SIP, STP, SWP etc.

SIP is not the only disciplined strategy to invest in or use mutual funds. There is a Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP) too. Let’s find out what these plans are meant for and what do they offer and how you can employ them to enhance your financial portfolio.

  • Systematic investment plan (SIP)

Investing through an SIP for a specific tenure helps to spread out your money across market cycles and averages the cost of investing. This prevents you from pledging all your money to a market high or market low. Here, the short-term fluctuations often don’t impact the long-term outcome.

SIPs have the maximum scope when you invest in equity funds like tax-saving mutual funds (ELSS). It doesn’t make sense to invest in debt funds systematically as they are low-risk schemes anyway.

  • Systematic Transfer Plan (STP)

Usually, one chooses an STP when they want to invest a lump sum in a scheme. STP also works like an SIP in diversifying and rupee-cost averaging. The only difference is that an STP helps to park a lump sum in one scheme (often debt or money market instrument plan) and then transfer a pre-agreed sum to another investment like an equity plan.

The purpose of an STP is to make some additional money on the lump sum, while it gets invested in equities. It is better to do an STP from a debt fund rather than a bank account since the former generates higher returns than the latter.

  • Systematic Withdrawal Plan (SWP)

An SWP enables you to withdraw a fixed amount from your mutual fund corpus (that you have already accumulated) in a ‘systematic’ fashion. This strategy is especially suitable for pensioners, who do not want to withdraw the entire corpus but need a steady income. Like SIP, protection from market volatility to some extent is something SWPs also offer. You don’t need to time the market at all.

Nowadays, you can easily sign up for one online by submitting the documents and setting up a payment schedule in one go. Set it on auto-debit on a date soon after your salary day and then plan your monthly expenses. It will make a huge difference to your financial lives.

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