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5 Brilliant Ways To Use Mutual Fund SIPs - Don't Ignore The Last One - Outside View by PersonalFN

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5 Brilliant Ways To Use Mutual Fund SIPs - Don't Ignore The Last One
Sep 21, 2017

There are several benefits of investing in mutual funds through a Systematic Investment Plan (SIP). Many of you might be well versed with the features and benefits of a mutual fund SIP.

But unfortunately, some opt for mutual fund SIPs in the spur of the moment, without any focus or plan in place. This can lead to a lack of adequate investments.

Many randomly invest Rs 1,000 or Rs 5,000 per month even when they can save much more. They may invest the balance of their savings in inefficient products like recurring deposits, bank fixed deposits, or insurance-cum-investment products. This can do more harm than good to one's long-term financial wellbeing.

Therefore, before you invest, you need to first decide on the purpose of starting an SIP. Whether it is to invest for accomplishing certain financial goals or if it is just to invest the surplus amount in your bank account.

For each of these purposes, apart from picking an appropriate scheme, you need to define the monthly or quarterly investment amount and tenure. In addition, ensure that the asset allocation conforms to your risk profile.

A mutual fund SIP can serve multiple purposes. Below, we have highlighted the main uses of a mutual fund SIP.

  1. To Meet Financial Goals

    The key reasons to SIP into mutual funds is to plan your children's future (their education and marriage needs), your own retirement, among a host of other tangible needs. Once you have identified the corpus needed and the monthly investment required to fulfil these goals within a given timeframe, you can setup an SIP. All you have to do is pick the right funds and start. Your SIP investments will benefit from rupee-cost averaging and compounding, thus ensuring your financial goals stay on track.
  2. Save or Invest Your Monthly Surplus Wisely

    At times, you may be adequately saving towards different financial goals; yet after factoring in expenses and having a contingency fund in place, you may be still left with a certain amount of savings. Such savings if allowed to accumulate in the bank account will be eaten away by inflation. Thus, you need to find efficient ways to route your savings. Once you have worked out your cash flows, you can route your monthly surplus to mutual funds via an SIP. It isn't mandatory to pick equity funds, you can choose from a wide range of debt funds, as well, to reduce risk and maintain liquidity. If carefully chosen, certain liquid funds are more efficient and a suitable alternative to a bank savings account.
  3. Build Your Contingency Fund

    If you have not done this already, it is essential to set aside a fund to tide over emergency or contingent expenses arising from loss due to a natural calamity, medical emergency, or job. Ideally, it is essential to set aside a corpus that is sufficient to cover six month of expenses, including debt repayments and insurance premiums. Thus, a contingency fund can total up to a significantly large amount-one that cannot be created overnight. Hence, you need to save regularly towards a contingency fund and top it up adequately as your expenses grow. You can easily build a contingency fund with mutual funds. Saving a set amount every month via a SIP will ensure that you build and grow your corpus efficiently.
  4. Stagger Your Lump Sum Amount Systematically

    Doing a one-time investment (even when you have received windfall) in equity mutual funds can be risky, particularly when the markets are at a peak. There is a probability that the markets may dip lower in the near term, and your investment may not yield the best returns. To safeguard from this risk, staggering the lump sum investment is worthy, as you benefit from rupee-cost averaging and compounding over time. So, even if you have received windfall gains, split the investment into monthly or quarterly instalments, whereby you can even out market volatility. Thus, for an investment corpus of Rs 1.2 lakh, start a 1-year SIP with a monthly instalment of Rs 10,000.
  5. Create a Corpus For Medical Expenditure

    The primary objective of a contingency fund is to substitute the lack of income. While it may even support emergency medical expenses, the soaring cost of hospital charges can wipe out a significant portion of an established contingency fund. Health insurance or mediclaim is certainly the first choice in such a situation, but often certain diseases or treatments may not be covered. There may even be an upper limit to fees and charges, as defined in the policy wordings. Hence, it is essential to set aside a corpus to fund medical expenses. You can create this corpus by saving a small amount every month through a SIP in a short-term debt mutual fund scheme.

Well, with these five ways to use a mutual fund SIP, there is absolutely no excuse for not starting a SIP immediately. An SIP may prove beneficial in more ways than one. If finding the right mutual fund to start a SIP in is a hurdle for you, then we have just the right springboard to overcome it.

PersonalFN, with over decades of experience, has put together a research report on potentially the best mutual fund SIPs for your long-term portfolio - The Super Investment Portfolio - For SIP Investors.

After a rigorous shortlisting process, PersonalFN goes a step ahead when picking mutual fund schemes that are SIP-worthy. Under this, we conduct a detailed analysis on how SIPs in the top shortlisted mutual fund schemes have performed, across multiple market conditions and timeframes. Only those funds that successfully pass this evaluation are chosen.

Don't miss out on early bird discounts. Subscribe to the report here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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