How to create wealth using mutual fund SIPs

economictimes.indiatimes.com:

fund schemes because she feels she lacks the expertise for active investment monitoring.

Riya’s financial journey can be likened to a three-part story: wealth creation, protection, and distribution. Each part needs a different plan and investment.

At this stage, her focus should be creating wealth through systematic investment plans (SIPs). SIPs will enable her to save fixed amounts at regular intervals, smoothing market volatility by purchasing more units at lower NAVs and fewer at higher ones.

By investing Rs.5,000 monthly via SIPs in equity mutual funds and increasing it annually by 10% as her income rises, she could accumulate a corpus of Rs.43 lakh by age 35. She should aim to withdraw Rs.30 lakh to make a down payment on a house, another Rs.50 lakh to fund her luxury car at 50 years, another Rs.50 lakh to fund her child’s education at 58 years and still be able to retire with Rs.5.5 crore at 60.

That’s what the power of compounding of a small monthly amount can achieve over a long period of time!

Before approaching every major financial goal, such as house, luxury car or her child’s education, she should transfer units worth the required amount from her portfolio of equity mutual funds to a less volatile debt mutual fund in order to protect her corpus from any major downside event. For a requirement of Rs.30 lakh, she could set up a systematic transfer plan (STP) one year in advance, transferring Rs.2.5 lakh each month.

This would allow her to continue earning relatively higher equity returns on the remaining balance while safeguarding the accumulated wealth from any sudden market fluctuations. Besides, she will earn a higher return than her savings account and enjoy the benefits of an SIP, smoothing out market