Retirement planning is best started as early as possible. Many people commit the mistake of starting too late. Many who do realise its important, either start saving too little or they simply save money in a bank - instead of investing. By the time you reach retirement age, the price of everyday commodities will be much more than it is today. Not only will it be more expensive, certain other expenses will get also get added - like medical bills and so on.
People often complain they do not have enough to invest. People’s spending adjusts to their income. The more you earn, the more you’ll spend. This is how even after getting a raise, people still find it difficult to save for investing. One great way to ensure you invest is to treat it like tax. Which means, you invest before you spend.
SIP (Systematic Investment Plan) is a method of investing in mutual funds. Every month, on a date of your choice, a fixed amount of money will get deducted from your account. This amount gets invested in a mutual fund of your choice. In case of SIP, the choice is completely yours. You have to choose the amount to be deducted, the date on which the amount is deducted, the mutual fund the amount is invested in, and so on.
Mutual funds come in various types. Each type is best suited to different levels of risk. The higher the risk in a given category, the better the chances of high returns. Very broadly, they are of 2 types. Debt mutual funds and equity mutual funds.
1. Debt mutual funds invest in low-risk investment options. These funds give returns that are better than FD with similar lower levels of risk. This makes debt mutual funds an excellent option if you do not wish to take high risk. Starting an SIP in a debt mutual fund then is similar to opening an RD account.
2. Equity mutual funds on the other hand invest in stock markets. There are many types of equity mutual funds. Some are low risk while some are high risk. Over the years, many of these equity mutual funds have performed excellently.
Take the example of Aditya Birla SL Advantage Fund. It was launched back in 1995. It is more than 20 years old. And over that period, it has given returns well in excess of 18% per annum!
Debt mutual fund or equity mutual fund?
You should ideally invest in both types of funds. A good rule of thumb is:
100 - <Your age> = percentage in equity
So if you’re 30 years old, 70% of your investment should go to equity mutual funds. The rest should go to debt funds.
Which date to set up?
To ensure that you do invest, always set the SIP auto-deduct date to the date right after the day you get payment. That way, you will invest before you spend.
● In SIP, the money will get automatically deducted from your account. This means you do not have to put in effort to invest every month. Note here though, you can stop an SIP any time you want.
● SIP takes the worry out of mutual fund investments. You invest every month, whether the markets are doing good or not. When the markets are low, you’ll get more mutual fund units in return. When the markets are high you’ll get fewer. Over time, cheap investments will balance the expensive ones.
● The minimum amount to start SIP is very low for most mutual fund. For most mutual funds, it is Rs 500 per month.
● It is much easier than most other options. You can start SIP using the offline method which involves buying mutual funds via a broker. Or, a much easier option would be to use online mutual fund platforms
By using SIP to invest in mutual funds of all types, you can ensure you get comparatively better returns than other options with similar risk. The sooner you start, the longer compounding will act on your investment - thus ensuring your retirement corpus is very high.