How I learned about financial discipline through SIPs
Updated: Jan 23
I have a confession to make. My idea of saving was to keep my money in my savings bank account. The most adventurous I could be was Fixed Deposits. But today, I cannot even explain how foolish I feel when I see how much money I have lost by just letting it sit idle.
Let me explain – I wanted to have ₹ 2,00,000 for personal expenses and gift shopping on my honeymoon. I had more than that in my savings account, just sitting, making me feel good, and felt confident that I could just withdraw it and spend it. But when I did the math, I saw that if I had invested a small amount every month through SIPs, I could have got ₹2,00,000 after saving only ₹1,87,368 over the year or to break it down, by saving approximately ₹ 15,614 per month for 12 months. I lost almost ₹ 12,000 which I could have earned through sensible investing.
What are SIPs
So now you would probably be wanting to know what SIPs are. Well, to put it very simply, SIPs are nothing but a process. SIPs or Systematic Investment Plans are exactly that – they are a systematic way of investing your money, at your convenience and on your terms. You need to just decide how much money you want to invest every month and systematically, this money will get deducted from your account and invested in different kinds of mutual funds. The best thing about SIPs is that the money is invested based on your needs. You could choose either liquid funds (best for short-term goals) or equity funds (where you put in money for a longer duration for better growth).
Intrigued? Well, you should be! SIPs may prove to be the ideal way for you to start taking control of your money. You can find the right SIP for all your goals – long-term or short-term. A Recurring Deposit or Fixed Deposit earns you a certain amount of interest which is also taxable. A mutual fund through SIP, on the other hand, earns you a better rate of interest and post taxes also it is effective. How it happens is simple, the funds that your money is invested in earn through ensuring the rupee cost averaging – you buy more when the market is down and less when the market is up so you end up benefitting from the market volatility. Plus the interest is calculated on the compounded rate – every rupee you invest earns interest and the interest earns interest.
Short-term and long-term goals
Your money is invested in liquid funds which are typically Debt Funds that invest in papers that mature every 91 days. These are ideal investments for short-term goals like a dream holiday or a wardrobe overhaul. You may have separate savings account for your holiday fund, but you will earn more interest in a debt fund. So you can earmark your SIP for that Caribbean cruise with the freedom to withdraw your money whenever you want.
If you want to do some long-term investments, 5 years and beyond, you can choose a SIP into a mutual fund which is an Equity Fund.
Itching to get started? Hold your horses. First, you need to do a reality check. Define your expenses and decide how much you can save every month. A good way of doing this is to work backwards – decide how much money you need to save for your goals. It could be anything. You may want to create a corpus to fund your own venture, send your kids abroad for higher education, it could be foreign travel, you may want to plan for a pregnancy, buying a car, you might even want to save up for your own wedding. Once you know how much money you need and when you can easily figure out how much you need to save every month. Financial advisors will call this process – calculating your risk appetite and asset allocation capability. (Don’t be intimidated by jargon!) It simply means how much risk you can take and how your money must be distributed across various funds. Now that you know how much you need to save, you need to be able to manage your expenses in the rest of your salary. The financial discipline that investing in SIPs teaches is a side-effect that no amount of schooling can give you.
Picking the right SIP
You can either do your own research by comparing current mutual fund schemes and seeing their market performance and return rates for the past 3 to 5 years. You could also get on board the Basis app and can start after a simple onboarding process that requires you to submit identification and address proof. We help you understand your risk profile and based on this and the amount you want to invest – recommend a combination of SIPs. You can select the payment routine, decide the duration you want to invest for and start investing!
Bonus tip on getting started
Here’s a small tip that helped me a lot – I set my SIP instalment date as the 5th of every month. My salary is credited before the end of the previous month. I am flush with funds to invest in SIPs while simultaneously paying off my monthly within the first week. Synchronising my expenses and investments leaves me stress-free for the rest of the month and often, I end up saving more by the end of the month as I have become a more disciplined spender.