Mutual fund SIP a better option for an investor
The SIP should be increased every year looking at inflation rate, income status and investment goals, as the value of currency also decreases
An investor is always worried about the value of his investments, but he should keep one aspect in his mind that he must keep on reviewing his needs with the passage of time. Because investment is a long-term process and results depend on good amount of patience and sound decisions.
Keeping this aspect in mind, one should opt for a systematic investment plan (SIP) that requires stepping up every year, if a person has started it in his younger days.
The SIP should be increased every year looking at inflation rate, income status, and investment goals, as the value of currency also decreases with time. We can take one example of it. According to consumer price index, today’s Rs 206.50 is equivalent to Rs 100’s value 10 years back. In the last ten years, the average inflation rate has been 7.57%.
If you have calculated your future wealth requirement to be Rs one crore in 20 years. But considering inflation trends in the past years, a better target comes close to Rs. 3.5 crore. This assumption is based on the average inflation rate, if it approximately remains the same as the recent past.
Although fixing a target is difficult, it is better to set a goal for protection against the adverse effects of inflation.
With periodic increase in your investments in tandem with the rise in your monthly income, this will be helpful in creation of greater wealth besides beating the inflation.
For SIP top-up amount, the key factors like age, investment years available, and financial goals are very important. Because a greater investment tenure (from the age of 30 to 60) offers greater chances of compounded returns. With a disciplined investment plan, one can secure oneself financially.
If we start with an investment of around Rs 5,000 per month. One can opt for either a fixed amount every month or with a long-term plan or with a step-up SIP where monthly contribution increases by a few per cent annually.
In the step-up plan, if one starts with a monthly investment of Rs 5000 and increase it by 10 percent each year – Rs 5500 in the second year, Rs 6050 in the third, and so on. In the final year of 20-year plan, the monthly contribution would rise to Rs 30,500. This may appear a lot today, but in the next 20 years the investor’s income will also rise substantially, along with erosion in the value of currency due to inflation.
Therefore, stepping up has great deal of advantage for an investor to have better results.