Involves Less Risk - going via SIP route has relatively less risk compared to investing money directly in stocks. Flexibility In Paying
Installments - with SIP, one has the freedom to pay a pre-decided amount of money according to his convenience, i.e., even if you miss paying an installment, nobody will come after you with legal notice.
Set a target amount - for the goal. For e.g. a goal to buy a car worth Rs. 10 lakhs!
Set the time horizon - to achieve the above goal. In how many years do you want to own that car, 5 years? This is the time period for which your investment for this particular goal should be done. Further, keep one thing in mind that equity investments should be for the long term. Now, to make sense of that long term, look at the past 18 years data, in any 10 years period (rolling) the worst performance of Sensex is 8% which is even higher than the average post tax returns on Fixed Income. Please, note again, this was the worst case. Assess your risk profile - to check your own risk taking capacity, otherwise you will be either taking too much risk (higher exposure to stock market/equity mutual funds) or too less (higher exposure to fixed income like FDs, debt mutual funds, endowment plans etc.). For e.g. a typical moderate risk profile portfolio would have 60% in equity and 40% in debt.
Asset Allocation - i.e percentage of money that should be invested in each equity (Asset type - risky but higher returns) and fixed income/debt(Asset type - safe but lesser returns), based on your risk taking capacity and time horizon to achieve the goal. For shorter time horizons, invest more in debt. For longer time horizons invest more in equity. However don’t exceed your risk tolerance while doing so.
Select the best funds - for each asset class, run an in-depth analysis to come up with a list for consistent mutual fund out-performers with the best returns. This list should be monitored and should be updated over time. It is advisable to invest in well diversified funds only and leave the allocation in different sectors (like Banking, FMCG, Health etc.) to the professional fund managers.
Start investing - in your goal to achieve it! This is a critical step because majority people just daydream about their plans and therefore it is important to overcome your inertia of actually starting/implementing the plan. The investment frequency should match with your cash inflow, e.g. monthly for a salaried person.
Stick to the plan - periodically monitor your goal path to check if you are on track to achieve it. If you are out of track then analyze the problem (e.g. you missed investing in a particular month) and do the course correction (e.g. putting the missed investment amount in the goal) to bring yourself back on track to achieve the goal.
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