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Planning to start saving regularly?

   A few years ago, Public Provident Fund and Recurring Deposits topped the popularity charts when it came to parking monthly savings. Of late, however, these traditional accumulating tools have had to face some competition as an increase in awareness has resulted in many small investors choosing to shed their apprehensions about stocks and mutual funds. The expansion in the options basket has put some investors in a quandary — that of zeroing in on the avenue that is best suited for them. Listed below are five popular regular savings instruments and their features that could help investors identify the right option:

Systematic Investment Plans    

This one is a favorite with most investment advisors, thanks to the lucrative returns on offer. Systematic Investment Plans (SIP) is a low-cost method of investing in the equity market, with a medium to long-term view (more than three years). Says Transcend India director Kartik Jhaveri: This is the best option for all age groups, especially for the young and middle-age group, who are in a phase to build wealth. SIP is good for youngsters and people in their 30s, but is not recommended for retirees and senior citizens. Also, although it is capable of generating high returns, the element of risk constitutes the downside. After parking your money in a MF for three years, you could still end up with negative returns, if the markets crash.

Recurring Deposits with Banks    

While Recurring Deposits (RD) is a popular instrument, the rising inflation has taken some sheen off this avenue. The advantages of an RD with a bank include the low risk factor — the returns are quite certain. “It is suitable for people who do not have access to quality research on stocks and MFs or fall in the middle and low income brackets, as taxes eat into 1/3 of returns generated by an RD. This means that people falling in the high-income bracket could consider more remunerative options. Also, this is an avenue that is worst-affected by inflation. In the current scenario, post tax RD returns fail to beat inflation. It is for the risk averse who don’t need to create wealth — taxation on interest earnings is a big negative. The liquidity that recurring deposit offers comes at a cost.

Post Office Recurring Deposits    

Post office RD is superior to bank RDs in terms of safety as it is backed by the government, but the returns are lower as well. Experts feel that it is suitable only for the low income groups.


Public Provident Fund    

Public Provident Fund (PPF) is a fruitful avenue for those who are not in need of liquidity in the near-term and are looking to save for long-term goals. This is because; it comes with a lock-in period of 7-15 years, which means that people saving for short to medium-term goals will find it of little use. You can invest between Rs 500 and Rs 70,000 in a PPF account every year. PPF, which is deemed to be ideal for middle income and low-income groups, boasts of nearly zero risk, but yields decent returns. What makes it more attractive is the tax benefit (under section 80 C) attached to it — an investment in PPF, thus, serves the dual purpose of saving and tax planning.

SLOW & STEADY

Systematic Investment Plans help not only in developing financial discipline but also in minimizing losses when markets turn choppy.


   You’d sure want your money to grow fast and wouldn’t hesitate to explore different avenues. While some of you track market moves, others keep abreast of the bullion market or skip through reams of information on mutual funds. But the basic principle of a sound investment doesn’t lie in picking up the best product. It lies in making regular investments. Systematic Investment Plans (SIP) is one such route which helps not only in developing a financial discipline but also minimize your losses when the markets turn choppy. Here’s a pocket guide on what to keep in mind before you start your journey on the SIP route.

FIRST THINGS FIRST

So what is a SIP? In simple words, it is a disciplined way of investments, where you allocate fixed amounts at a regular frequency. According to financial planners, this time-tested investment approach inculcates a flair for regular investments and also helps you to navigate through the narrow lanes of Dalal Street. It is like saving coins in a piggy bank and one fine day when you open it, you find it has more than what you expected. SIP works in the same manner, just that it adds the acceleration gear ‘The Power of Equity’ to it and within years your expectations are surpassed.
   Analysts hold the view that SIPs are one of the best tried and tested formulas to make a fortune regardless of market conditions. They help create wealth in a regimented manner over a longer period of time and act as a buffer against all investment-related injuries.

RIDING MARKET FLUCTUATIONS

Although SIPs generally apply to mutual funds, you could use this method to buy stocks directly or make regular investment in other instruments such as PF and insurance. It is often used as a method of riding the market fluctuations effectively. For instance, if you buy an equity mutual fund at a regular investment, say Rs 1,000 per month for a year, if the markets go up during this period, you will get less units. However, if the market is down, you will end up buying more units, hence over the long-term, you can ride away the risk of short-term fluctuations.
  This method is also called ‘rupee cost averaging’. This ensures that you don’t try to time the market and generate consistent returns on an equity portfolio through investing across market cycles.
   Analysts believe that you should focus on building a portfolio of investments suited for the medium to long term instead of trying to latch on to the latest market trend. You can always look at the SIP route to take exposure to equities in order to reduce the impact of volatility on your portfolio. This not only helps you stride through choppy markets but also enables you to buy into the market at a lower average price through a consistent, long term investment approach.

CHECKLIST

Personal finance experts believe that the choice of investing weekly or monthly depends entirely upon the risk-taking ability, quantum of amount you are willing to shell out and fund selection. It is important to choose a fund that has a long-term track record, and has a proven performance over a significant period of time and across market uncertainties. Factors can also differ according to time frames. For example, a small and mid-cap fund could be a rewarding SIP investment through a weekly SIP plan in a volatile market, as it helps capture the aggressive gains in mid-cap stocks, while a monthly SIP in a large cap fund may be advisable in a market that is steadier in nature.
   Analysts caution that you should not get carried away by short-term returns and look for funds with established performance track record across market cycles. It’s also noteworthy that you should have asset allocation plan after a thorough analysis of your financial goals, time horizon and tolerance for risk.

WATCH OUT

You can always check out with your agent that if there are any rebates that you can get, while opting for a particular investment product. Financial planners believe that it is necessary to invest in well-diversified funds, and ensure that the commitment towards the SIP is carried out over the entire length of the investment. Since an SIP investment works through cost averaging investments across a period of time, there may be times when a deep correction in the market may merit larger investments at a specific point of time, which you may miss out due to specific SIP intervals.
   There is a theory that SIP investment works best when it is in conjunction with other lump sum investments. Also, you should remember that an SIP investment only generates consistent returns if the investment plan is adhered to. However, in the event of missing out on a payment, you can buy in through a lump sum investment in that month and carry on investing through SIPs across the remaining investment horizon. The key factor in an SIP is to stick to a regular investment plan and lower your average cost of buying in the markets. And a well-crafted financial plan will not only maximize your returns but also help you in volatile times