use sip for debt, equity funds for long term goals, use · or most investors, a sys-tematic...

YOU ARE READY TO STARTYOUR LONG TERM SIP

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For most investors, a sys-tematic investment plan(SIP) means an SIP in anequity fund, and mostly forlong term wealth creation

to achieve a goal which is some yearsdown the line. However, if you ask fi-nancial planners they will tell youthat you can also have SIP in debtfunds. Depending on your time hori-zon for investment, from a few monthsto several years, you can choose theappropriate debt scheme and set upthe SIP accordingly. Depending onyour requirement, you could also setup multiple SIPs. Some financial plan-ners can even help you set up a struc-ture where you transfer money onlyonce at a pre-fixed interval, and yourmoney goes into several SIPs.

According to financial planners,there are a few factors to considerwhile setting up a debt SIP. One ofthem is to select the appropriate

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Amit N Thakkar replies:Here the question andpredicament raised isrelevant to a large number ofinvestors. Any investmenthas to be rated and evaluatedby three yardstick: Safety,liquidity and returns,preferably in that order.Further tax-deductibilityand tax-free maturity shouldalso be considered. Now wecompare PPF, NPS and ELSSschemes because all are tax-deductible when invested.

PPF COUNTS VERYWELL on safety factor, it’sdeductible under section 80Cand also tax free at maturity.But it scores poorly on theother two counts. Downwardrevision of interest rate isalso looming for PPF.

NPS IS RELATIVELYSAFE but scores poorly on

liquidity factor. Even aftermaturity you cannot opt fortotal sum and are compelledto put 40% of the corpus inan annuity. Returns arecomparable to PPF. Furtherit is partially taxable andasset allocation is relativelyinflexible.

INVESTING IN ELSS canbe volatile for the short termbut reasonably safe in thelong run. A systematicinvesting method also brings

INVESTOR QUERYIt has been mentioned here earlierthat an investor should be sure ofthe abilities and experience of theteam at the fund house when aninvestor invests in a fund. As aninvestor, what are the questions weshould ask while inquiring aboutinvesting in debt funds? And howcan we be sure that the team willtake good care of our money?

– Sumi Verma, via email

R Raja replies

POINTERS FOR CHOOSINGA DEBT FUND> Investment objective of the fund:One should look for the investmentobjective of the fund and find outwhether it is suitable for theinvestment horizon of the investor.One cannot have an investmenthorizon of 45 days and invest in along term debt fund.> Corpus of the fund: In the debtmarket, on an average, theminimum lot size is around Rs 5crore while the minimum ticket size

in a primary issuecould be Rs 50crore. Hence avery small fund isat a distinctdisadvantage asit will not haveeconomies ofscale. A medium

sized fund could be an ideal choiceas it combines economics of scalewith maneuverability.> Costs: Expenses have a significantimpact on the relative performanceof debt funds. It's important to seethat your debt fund does not havethe highest expense ratio whiledelivering just about average orbelow-average returns.> Returns, coupled with creditquality: One has to look at thequality of the portfolio along withthe returns the fund generates asthe higher returns the fundgenerates could be due to modestor poor quality of the portfolio.

In addition these pointers, oneshould also evaluate the past trackrecord of the fund house inmanaging funds, the returns of allthe debt funds the fund housemanages- whether all the fundsprovide average to above averagereturns, the credit quality of all thefunds in general, and the trackrecord of the fund manager of thefund house managing the portfolios.

(R Raja is a top official with aleading domestic fund house

What is Rupee-cost averaging?Swatantra Kumar answers: It is a process to buy something of value atvarious price points by spending the same amount of money. As a result theaggregate cost of acquisition of the total amount averages out over time as

one buys more of the same when the price is low andless when the price is high. Rupee-cost averaging

is a popular method of investing in mutual fund, stocks,bonds etc. For example, you start investing in a mutual

fund scheme through a monthly SIP of Rs 3,000. Whenthe NAV of the schemes is Rs 20, then 150 units of the

scheme will accrue to your portfolio. As the NAVof the scheme rises over time, you will getless number of units. This way say when the

NAV reaches Rs 30, if you have notincreased your monthly SIPamount, 100 units of the schemewill accrue to your portfolio.However, if for some reason the

NAV of the scheme slides to Rs15, with the same SIP amount,

200 units will accrue to yourportfolio.

Use SIP for debt, equity fundsChoose the right scheme considering investment horizons, risk factors and exit load

CASE STUDY

DEMYSTIFIER

I am a 35-yr old single woman in the annual earningsbracket of Rs 7-10 lakh. My current investments are:

Will it be better for me to opt for PPF or NPS for 20 years, ata yearly contribution of Rs 60,000? Is it advisable to increasemy portfolio further in hybrid funds via SIP? What are theother investment options__long term, medium term andshort term I can opt for?

S Sikdar, via email

Funds Tenure Investments:Monthly/Annual (Rs)

Fund House A (ELSS) 3 years 3,000/36,000Fund House B - Value Fund 5 years 2,000/24,000Fund House B - BalancedFund (Direct) 5 years 1,500/18,000Life insurance 15 years 2,500/30,000

For long term goals, usediversified equity schemes

December 31, 2015 will bearound Rs 39 lakh. The sameamount if invested in anELSS for the same timehorizon with a 20-year trackrecord will accumulateapproximately Rs 2.66 crore,which is tax free. Sadly thisoutperformance has mostlygone unnoticed by majorityof the investors. Moral of thestory: Guaranteed returnmay ensure safety but is lessrewarding.

INVESTMENTS INEQUITY or relatedinstruments should ideallygive returns equivalent toGDP growth + inflation.Fixed income instruments,on the other hand, will givereturns equivalent to theprevailing interest rate in theeconomy, which at best maymatch inflation rate,resulting in zero or negativereal rate of return.

MAJORITY OF HYBRIDFUNDS are not eligible forincome tax deductionsbarring some retirementfunds which again have issuesof exit loads and liquidity.Given the 20-year timehorizon, you could invest indiversified multi cap funds,and if section 80C limits havenot been exhausted, then SIPin ELSS funds. If 80C limit hasbeen exhausted and you stillcan invest, consider investingin open ended diversifiedmulti cap equity funds.

Since you are single andassuming you don’t have anydependant, life insurance willplay second fiddle. Yourprimary requirement shouldbe adequate health insurance.Also build an emergency fundof Rs 5 lakh in liquid andshort term fund.

Amit N Thakkar is aSurat-based financial

planner

HOW TO START AN SIPHere's the step by step approach to set up an SIP in an equity fund

(We assume you have an Income tax PAN and a bank account)

Yes

Select the fund you wantto invest in

Can you start investingonline?

Log on the fund house's website

Select the fund1) Fill up the relevant form forinvesting 2) Fill up the form for bankmandate3) Ensure there is adequatefund in your account everymonth on the relevant date

Fill up KYC registration form(the fund house usuallyfacilitates KYC compliance)

1) Get the helpline numberof the fund house and askfor relevant forms2) You can also take help ofa MF distributor/FinancialPlanner/Financial Advisor

Are you Know Your Client (KYC) compliant under Sebi?

Investing money is the process ofcommitting resources in a strategic

way to accomplish a specific objective

Allan Gotthardt, author and investment advisor

GURU SPEAK

accordingly. For example, we set upSIPs which automatically goes intoequity and balanced funds,” he said.

According to Shrikanth, to set upan SIP at the portfolio level, three fac-tors are taken into account: risk pro-file of the investor, amount of mon-ey to be invested and the time frame.For example, if someone is investingRs 10,000 every month for 10 years,the corpus will be distributed in onedebt funds and three equity funds,and SIPs would be set up in all fourschemes. Again, if someone is in-vesting Rs 3,000 per month for 10years, the SIP would be in a balancedfund, he said.

In situations where there is scopefor lump sum investment, usually fi-nancial planners set up at systemat-ic transfer plan (STP) which in effecttransfer a pre-fixed amount of mon-ey from this fund to other funds atregular intervals, Shrikanth said.

better alternative, financial plannerssay.

According to Srikanth Meenakshi,founder-director, FundsIndia, in-vestors can set up an SIP at the port-folio level, rather than at the fundlevel. “We suggest a portfolio ap-proach to investing and set up SIPs

scheme. Like equity funds, debt fundsalso come in various flavours and soeach type of scheme can serve a dif-ferent purpose. For example, if yourtime horizon is a few months and thepurpose is to pay the annual healthinsurance premium, you can use anSIP in a short term debt fund. On theother hand, if your investment hori-zon is for a few months, liquid fundor ultra short term fund could be a

NEXT EDITIONThe current volatility in the market has made a large number of investors nervous.In our next edition we will discuss what investors can do in a volatile market.

in rupee-cost averaging. It isalso very liquid. Expectedgrowth and returns fromELSS is phenomenal vis-à-visalternate asset classes. Forexample, Rs 70,000 investedfor 16 years, Rs 1 lakh for twoyears and Rs 1.5 lakh for twoyears (total of Rs 16.2 lakhover 20 years) in PPF on

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THINGS TO KEEP IN MINDWHILE SETTING UP AN SIP 1. Investment horizon: Don't set

up an SIP in a long term fund ifyour investment goal is shortterm and vice versa

2. Risk appetite: Try to matchyour risk appetite with an ap-propriate scheme

3. Exit load: This is more relevantfor SIP in debt funds since alarge number of funds haveexit loads

4. Volatility: Some debt and equi-ty schemes could show volatili-ty in the short term

ADVANTAGES OF SIPINVESTING1. Discipline in investing: You in-

vest regularly, a pre-fixedamount

2. Average out volatility: Over along period, the impact ofvolatility comes down for thescheme in which you have setup an SIP

3. Power of compounding: If theSIP is for the long term, youcan get the benefit of power ofcompounding

4. Rupee-cost averaging: Sinceyou invest regularly, you buymore when the price is low andless when the price is high,thus averaging out the costover the long term

5. Tax advantage: In most longterm SIPs, you enjoy tax bene-fits

THE TIMES OF INDIA, MUMBAI TUESDAY, JANUARY 26, 2016 17