Wonder if you get to save money ahead of time for a vacation that you plan to take next year or buy a new house next year in a regular and a disciplined manner. Sounds great; isn’t it??? SIP’s are a great way to accumulate money by way of small regular savings.
People who invest via SIP often say “pata hi nahi chalta, kab paise jud jaate hai”
How to make the best use of SIP
Link your SIP with your financial goals as it is easy to accumulate small amounts of money regularly rather than arranging a large sum when the financial goal arrives. One should align his/her investments as per the financial goals and their time horizons to avoid any kind of surprises in returns.
Equity funds are good for long duration (atleast 10 years) as it neutralises the market risks. You must give at least 100 instalments in an equity fund before you make your first withdrawal.
But not all the money is for long term
Not every investment can be made for 10-15 years horizon. There could be many things for which we might need money in short-run; which may vary from 1-5 years. The question here is “Can we save and invest regularly for a goal which is just a year away”? Of course yes, SIP again works well here.
So the process remains the same “Invest monthly but in debt funds this time” as debt funds offer stable returns with lesser risk. For your short term goals go for tools that carry lesser risk and give steady returns.
Alternative to a RD
Most of us are aware of Recurring Deposit either in bank or in a post office wherein money is invested for a specified period which is generally 5 years. However it does not permit partial withdrawals before the maturity date.
If all the above points can be turned into investors favour, then he/she should look at SIP in debt funds. It’s a flexible way of making regular and disciplined investment for short to medium term goals (1 year to 5 -7 years).
RD in bank or in post Office gets taxed under section under Section 56 (Other Income) which is one of the worst forms of taxation. On the other hand, Debt funds are fantastic products from taxation point of view as income gets taxed under section 45(Capital Gains). Sections 45 and 56 have been discussed in detail in one of our previous posts.
Let’s talk about Return now
For instance; let’s consider returns of Templeton India Short Term Income Plan (Debt Fund) wherein Mr. A has invested Rs.5000 a month. For returns analysis we have considered various time horizons for which the investment has been made all ending on 27-1-2014 and the returns that have been earned.
|Year||1 year||2 year||3 year||4 year||5 year|
|Amount Invested||Rs. 60,000||Rs. 1,20,000||Rs. 1,80,000||Rs. 2,40,000||Rs. 3,00,000|
|Maturity Value||Rs. 62,965||Rs. 1,31,949||Rs. 2,07,595||Rs. 2,88,400||Rs. 3,76,048|
|Rate of Return p.a.||9.2%||9.4%||9.5%||9.1%||9%|
From the above analysis it is clear that debt funds are good for short to medium term goals as they offer stable return with low risk and are also tax efficient as compared to traditional RD’s. The only benefit that an RD offers is that it gives the maturity value in writing.Think about it; “Can you ignore Debt funds just because they don’t give you the maturity value in writing?