For any young salaried professional, starting investments is possibly the biggest marker that their childhood has drawn to a close, and adulthood has begun in earnest. In a country like India, however, where financial literacy continues to remain perilously low, confusion abounds on how exactly to start investing to secure one’s future, or even generate wealth for future generations.
Equity-linked funds, debt funds, hybrid funds, liquid funds – the choices are varied, and can be equally confusing to all. No one starts off being a seasoned investor, and the options on offer can often be overwhelming. Most of us are told that the easiest and most convenient way to start securing one’s financial future is to begin a Systematic Investment Plan (SIP).
Choose a mutual fund that will invest in a particular basket of stocks, pay a relatively small sum that gets debited from your bank account every month on a fixed date, and sit back and wait for the fund manager to work his or her magic, by delivering alpha returns over the long-term.
Data has shown that SIPs enforce the habit and discipline of saving and investing regularly. Salaried professionals can save every month and plan their investments from their monthly paychecks. Based on historical data, various studies have shown that the chances of losses on a SIP being run for five years are close to zero.
But this also comes without its share of pitfalls. Firstly, today’s millennial salaried professional has grown up in the age of the Internet and is more likely than not, much more consumer-focused than previous generations. And that certainly comes with its share of challenges.
In India, while more than ₹12,000 crore is invested through SIPs every month by common investors, a massive 25%-40% of the SIPs registered through online platforms (depending on the intermediary platform), are stopped within the first six months. Shockingly, only 3% of Indians currently have their SIPs running concurrently, a remarkably low number by any standard.
Additionally, given consumption patterns, rate of inflation and advent of sudden and unplanned expenses, such as medical emergencies and others, which can upend the monthly budget, salaried professionals often end up missing their monthly payments, which can then lead to further penalties imposed by the bank.
Bank charges can range from ₹250- ₹750 for each failed SIP due to an inadequate account balance. As per detailed market research, this bank charge is one of the biggest reasons investors stop their SIP. The second biggest reason for not starting SIP is the uncertainty of being able to invest regularly since many investors have budgeting issues.
This is where the advent of no-penalty SIPs can remove a lot of headaches. To elucidate this point more clearly, in cases of inadequate account balance, the SIP for the month is smartly skipped and there are no penalties for the customers. If the investor has adequate money in their bank account, the next month’s SIP will be done as per the schedule in an automated way.
Now, the aforementioned salaried professionals can plan their monthly investments without fear of not having the required money in their bank account and facing bank penalties. No Penalty SIP will encourage and give confidence to lakhs of investors to start their Mutual Fund journey, without fear of penalties.
In conclusion, it is much better for an investor to run SIPs in mutual funds, and maybe even miss three-four SIPs in a year, rather than not running any at all.
(The author of this article is Business Head - Investments, Jupiter Money)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.