Checklist: The things we should do before Investing

A: Do we have a Goal in mind: Why we want to invest?

Generally we start investing by force either to save taxes or just because we have some surplus in our bank accounts. Most of the investments are made with no particular goal in mind and therefore get redeemed as and when there is a need of money. If we are starting a SIP just because some of our friends are doing it, then it’s like starting a journey without knowing the destination. That’s why determining the goal is the most important factor. It is important to know why we want to start the SIP – Is it for our retirement or for the higher education of our kids or the bunglow we want to build or maybe the big car we thought of to buy after 5 years or so. Once we are clear about what is the goal then we should start the SIP. We all know that with our current or even possible future income it will not be enough to fulfill all these goals. Therefore, an accumulation of investments over a long period of time through SIP route powered with compounding could generate the desired results. Hence, if we have a list of financial goals then we know our destination and may want to start a SIP.

B: How Much Money do we need: Current Value is not Sufficient

Once we are ready with the goals we want to achieve the next step is to determine how much amount would be required to fulfill them.  First we have to find out the current cost of these goals and then what is likely to be the future cost of this goal which may be higher due to inflation and other costs involved. For example - If we are planning to purchase our own home after ten years which is presently valued at 50 lakhs what amount do we need at that time? However we have planned to buy it after ten years the future value will be approximately 89.5 lakhs assuming inflation at 6%. Therefore, we have to start the SIP with the goal amount as 89.5 lakhs and not 50 lakhs. Knowing the money value of the goal, both present and future, is the key to determine why and how much you need to save through SIP.

C: What is the time period: Is it a Short, Medium or Long Term Goal

In our life span there are various goals and priorities which comes during of life journey. There are Short term goals which we want to achieve in a year or two like buying a car or a vacation trip. These goals have a very brief investment horizon and require safe and steady returns during the SIP tenure. Medium terms goals are those which have a minimum investment horizon of three to five years like a foreign holiday trip.  For medium term a part of investment in Equity Funds could be beneficial in such a scenario along with balanced and debt funds. Here, we also need to be careful about capital gains and implication on income tax. Long term goals are the ones that are five, ten or maybe many more years away. Retirement or higher education planning for a new born child, or a retirement home or even a world tour could be a long term goal. Defining each financial goals and the investment horizon of the goal will let give us the clarity about the investment we should make in present time to attain the required corpus in future value.

D: Right Asset Class: to Reach the goal on time

Choosing the right asset class is very important to achieve our financial goals. For example to cover a distance of 2-5 Km we may use a bicycle or a bike, for 10-20 Km bike or Car would be preferable for 50-100 Km distance Car or train would be preferable while 500-1000 Km distance it’s better to use train or plane but to cover a distance of 5000 Km plane is the ideal option whatsoever risky it may look like.  Similarly to cover the time period for achieving the financial goals also we need to select the instruments carefully. The asset allocation determines the returns rather than 50-individual selection of funds. In Mutual Funds we can invest for one day to 20 years through different type of schemes by selecting Liquid Funds, Equity Funds, Balanced funds and Debt Funds. The amount of investment we make in every asset class will determine the future value of the corpus. Liquid funds or short term debt funds are ideal for a short term goal as they provide returns in a short investment horizon. Partial investments in debt and or equity funds or balanced funds are crucial for medium term goals. And for a long term goal should invest more on equity oriented mutual funds. Risk taking capacity is also equally important while selecting the asset class, and If we are a risk averse investor, we should invest more in debt and balanced funds and avoid volatile equity funds.

E: Right SIP to achieve goals

Once we have decided the asset class the next step is to select the right schemes in that asset class so that we can easily achieve the goals. You should find a scheme that does the hard work for your investments. Ideally, you should invest in a diversified equity scheme that has consistent performance for the last three, five or ten years have less volatility as compared to its peers with decent portfolio size and have outperformed the category average and benchmark returns. The Asset Management Company should be reputed with good standing in the market and the fund manager should have an impeccable reputation in managing funds. A good track record of the fund manager is essential for choosing the right fund.

  

  

Monthly SIP Amount for Period (in years)  >	5	10	15	20	25	30
SIM Amount	Total Return in Rs. Lakhs at a rate of Return 15% P.a.
5,000.00	4.48	13.93	33.84	75.80	164.20	350.49
8,000.00	7.17	22.29	54.15	121.28	262.73	560.79
10,000.00	8.97	27.87	67.69	151.60	328.41	700.98
15,000.00	13.45	41.80	101.53	227.39	492.61	1,051.47
20,000.00	17.94	55.73	135.37	303.19	656.81	1,401.96
25,000.00	22.42	69.66	169.22	378.99	821.02	1,752.46

The above table contains a basic calculation on what could be the possible future values of monthly SIP investments. The future value could vary due to changes in the rate of returns generated over a period of time. If we have rightly calculated your future goal value then deciding the right SIP amount would be very easy, if we keep the return expectation little lower. For example – the fund chosen by you may show a historical annualised return of 18% but while deciding the right SIP amount we may conservatively calculate the return, say at 15% annualised. Therefore, even if in future the fund is able to generate 2-3% lesser then its historical returns, the goal amount can still be achieved. Therefore, it is very important to invest the right amount because in case of shortfall for certain corpus against which options such as borrowing can push a investor in financial trouble.