Through mutual funds SIPs, you can plan for your long-term goals. By using a systematic investment plan (SIP), you can plan for your financial future methodically and enjoy the benefits of rupee cost averaging and a methodical approach to investing. It is all about maximizing the power of compounding. The earlier you start your SIP, the longer it will run and the more likely you are to benefit from compounding.
1. When inflation calls for a shift in the financial plan
When the initial financial plan was devised, a 4.5% inflation rate was assumed to be sustainable for projecting future costs. However, in the span of 2 years, the rate has moved up, to 6.5%, because of increased oil and food prices. Such a 2% change can have severe implications; not only will cost projections after two decades be significantly greater necessitating higher investments, but present values of forthcoming investments will be adversely affected too. As such, you should take the time to examine possible solutions: either lower the size and value of your long-term objectives or boost SIP allocation in order to maintain financial comfort; however, taking on higher risks is not recommended since it could exceed your risk capacity.
2. When tax changes calls for a review in your SIP allocation
Consider how taxation on long term capital gains on equity funds will affect your future wealth as a classic example. Because equity funds were exempt from LTCG tax until April 2018, this will reduce your eventual wealth. Look at how you will need to adjust your SIP strategy in response to the LTCG tax.
Prior to April 2018, the purpose of a SIP was for foreign education and it would have needed Rs.1.70 crore after 15 years, with an Equity SIP of Rs.25,000 per month over that time. It had figured in a 15% CAGR return if invested over 15 years, with a total capital gains on SIP of Rs 1.24 crore and thus a total value of Rs.1.69 crore after 15 years, with no LTCG tax applicable. Post April 2018, the same parameters applied but an applicable LTCG tax (10% on excess over Rs.1 lakh) meant the net value plummets to Rs.1.57 crore after 15 years.
The solution is to increase the SIP by 10% to Rs.27,500 per month
3. Macro changes that impact equity and debt
Macroeconomic trends can have a major effect on the future value of your equity and debt holdings. For instance, when interest rates are increasing, long-duration bond funds will diminish in worth. To counteract this, you should move what investments you can into lower duration bond funds. Similarly, if GDP growth is slowing, it would be wise to reduce your exposure to cyclicals by shifting focus to more defensive plays that won’t be significantly impacted by changes in the economy’s cycles. This helps maintain good value over the long term.
4. There could be a shift in the goal posts
In this case, the goal posts could shift depending on a number of factors. For example, if you had planned for one child and were blessed with another, you need to begin planning for the second child. If you lose your job or have entrepreneur plans, you may have to rethink your goals. All of these are referred to as shifting goal posts and require a review and shift in your SIP strategy as well.
