Secret to wealth creation

Market Update:

The RBI decided to hold rates, while levying a temporary incremental Cash reserve ratio of 10% on Banks -Net demand and time liabilities, the measure will be reviewed in September and maybe withdrawn which will result in additional liquidity to Banks ahead of festive seasons.

The result of the above is being felt with the surge in inflation due to increase in vegetable prices esp. tomato over the past few weeks. Inflation is expected to increase in Aug 23 as well to around 6%, with increasing crude oil prices.

So, with increasing inflation, how can we secure our investments?

This month we look at the secret to wealth creation through an SIP top-ups in line with inflation

STARTING A SIP WITH TOP-UP - A SECRET TO WEALTH CREATION

In this fast-paced world, where time is precious and financial responsibilities grow with each passing day, finding an investment approach that aligns with your life's trajectory is paramount. A game-changing approach, SIP with Top-Up ensures that your investments keep up with your changing lifestyle and protects your wealth from inflation's eroding effects.

Gone are the days of monitoring market movements and constantly adjusting your investment plans. With SIP and its automated Top-Up feature, you set out on a hands-free journey to steadily and gradually amass wealth. As your income grows, so do your investments, and with the power of compounding, your wealth multiplies effortlessly.

SIP Top-up gives an ease of increasing your investments, the wisdom of regular contributions, and the extra potential of compounding growth. You can unlock the secret of building sustainable wealth and make financial independence achievable without your active participation. Let's explore further this simple yet revolutionary idea and understand certain aspects of building wealth with SIP Top-up.

1. Automation helps bring in Discipline:

SIP Top-up is a user-friendly strategy that promotes consistent and methodical investing through automation. It assists people in developing the habit of growing investments without having to worry about market timing or frequent manual modifications. However, it's essential to have a reasonable selection of suitable mutual fund schemes based on risk tolerance, investment horizon, and financial objectives.

Being automated also brings in the discipline of increasing your investments steadily with time. Often people start SIPs and then forget about it for years together thus effectively end up saving less and less every year, both due to inflation in absolute terms and as a percentage of your income. Even from the perspective of saving consistently in 'real-value' terms, the increase in SIPs yearly must at least match the inflation figures and one can add more to adjust for change in income levels and living standards.

2. Enables you to build wealth faster:

Increasing your SIPs with Top-Up facility can greatly improve growth of wealth and hasten the wealth creation journey for you along with accomplishment of financial objectives. This powerful strategy takes advantage of systematic investing, compounding, and automatic increments in savings to propel your wealth growth manifold. Let us understand the power of SIP Top-Up by comparing it with a normal SIP assuming market returns of 12%.

We can clearly observe that the wealth created increases by a substantial margin if we opt for a SIP Top-Up option across all horizons and more when the periods are longer with the power of compounding.

3. Helps Achieving Financial Goals:

SIP Top-Up is a useful tool for attaining your financial objectives faster once it is linked with your financial goals as compared to simple SIPs. Having a purpose-driven or goal oriented investment strategy that keeps you motivated and focused when you match and map your SIP investments with these objectives. With the benefit of compounding, even the goals that may seem to be unachievable can surprisingly look achievable if proper planning and SIP Top-Up needs are identified. Even when a simple SIP is sufficient, the Top-Up SIPs would add that extra layer of comfort and margin should anyway go wrong when the goal maturity is near. In addition, it will also take care of your increase in aspirations and living standards with time such that your goals need not be fixed.

Let us see this with an example where we have a higher education goal target amount of Rs.2 Crore, maturing after 15 years. Now assuming market returns 12%, we can see that the normal /fixed SIP amount required would be around Rs. 42,000 per month. However, if one decides to increase the SIP by Rs.5,000 every year, then the first year SIP amount required falls down drastically to around Rs. 17,000. Thus, a goal becomes more achievable with Top-up SIPs.

Now, what would happen if the person is capable of saving say Rs.42,000 and still do a top-up of Rs.5,000 every year? In such a scenario, the wealth created after 15 years would be Rs. 3.18+ crores, giving you an extra cushion to upgrade to the best college or have a margin of safety, just in case. The original target of Rs.2 crore would have been achieved around 3 years prior to the target date.

Bottom Line

To make the most of SIP with Top-Up, it is essential to start early, stay consistent, and invest for the long term. As a simple rule, we can think that every SIP has to be a SIP with Top-up SIP. As we have seen, the Top-Up SIPs can significantly transform the course of your financial journey by providing a simple yet efficient way of comfortably achieving your financial objectives along with discipline.

WHY DO GOAL-BASED INVESTMENTS WORK BETTER?

Have we reached all of the goals that we've set for ourselves in life? Leaving other goals aside, let's talk about our growing list of financial goals that we set and try to achieve through our investments. Despite estimating that a huge amount may be required to fulfill our needs, we hardly take any actions required to make them a reality. Most of us adopt a laid-back approach and do not match the savings required for achieving those goals. In fact, the question we should ask is whether have we even identified our goals and found out how much we need to save? Unfortunately, we end up compromising on our precious life goals like retirement, higher education for children and so on just because we cared a little less even though things would have been very different, had we taken this up on priority with all seriousness.

The fact of the matter is that people who have identified their financial goals and planned their investments around these goals are more likely to achieve them. It is very obvious, isn't it? We can see a substantial difference even when we compare the outcomes with 2 persons having the same goals and who are saving an equal amount of money today, the only difference being, one has identified his goals and mapped investments to the goals and one who hasn't done so. What can be the possible reasons for the success of the first person in our example? Let's see…

1. Identification/ Setting of objectives:

Financial objectives are directly related to a person's or a household's lifestyle preferences and needs. It is important to consider that your financial needs align with your desired lifestyle and income levels. Quantification of the needs helps clear this for us. For example, if you aim to retire early, you need to quantify the amount of savings required and establish a clear timeline. Adapting financial objectives to align with evolving lifestyles and needs may require adjustments and flexibility. This is the reason why identifying financial goals early on and then tracking them helps you as you know what is required and what you need to do about it.

2. Clarity / Purpose of Investment:

It is not sufficient to just identify needs. Determining your financial objectives and needs in detail might therefore have a stronger influence. These can include both immediate needs (like saving for a trip or a down payment) and long-term needs (like planning for retirement or paying for children's education). You will now more accurately decide on your investment's time horizon, the risk tolerance levels and the required asset allocation if you have specific objectives in mind. With limitations on saving funds, you would be forced to prioritize investments and to cut back or delay non-crucial goals like say upgrade of cards or exotic holidays. Your investments will have a specific purpose and will be best channelized to achieve them.

3. Focus on the right place:

Clarifying your investment objectives is crucial given that they should be your primary emphasis rather than product or scheme selection. All that really matters is not what the market is doing or what other people are saying. What matters for you is whether you are on your way to achieve your goals or not. That's important and rest everything is noise. Once you make a list of your financial goals and keep focus rightly on those things, you are less likely to make mistakes or act irrationally or let your behavioural biases impact your goals. You would be less likely to redeem your investments and make unnecessary expenses. Your focus would be where it actually should be.

4. Course Correction:

One ought to begin by reviewing his investments and determining whether they still line up with his financial goals. Check to see if any adjustments to your goals are necessary due to changes in your personal situation or the state of the market. Regular evaluation and review of your financial plans and your investments is required - either at a fixed frequency or as necessitated by sharp market movements, helps you to stay ahead of the outcomes and identify corrective actions. This naturally means that you would be more likely to invest when markets have corrected or to change asset allocation when the markets are at highs. Doing these small adjustments over time ensures that your financial goals are much more likely to be achieved.

5. Investment Behaviour and Discipline:

With the need-based investments and financial planning, your entire approach to investments would change. You would likely see markets in a different light and start evaluating the impact and outcomes not today but in the distant future for any action that you take. This change in approach automatically eliminates any impulsive behaviour and emotional decision making based out of greed, fear or hope. Decisions instead would likely be more based on logic and research. With time, you shall create your own style, rules and principles of investing, helping your transition to a wise and experienced investor.

6. Achieving Future Financial Needs:

Clearly defined goals and saving for them are prerequisites for achieving them. You have a much lesser chance of reaching your needs and objectives without clarity and a proactive strategy for saving. The last link in the circle of financial stability and wellbeing is indeed achieving future financial objectives. You can feel secure and at ease knowing that you have the means to support yourself and achieve the financial goals that you had set out for yourself, years ago. That sense of pride, peace and satisfaction for your family and yourself, is indeed priceless.

Bottom Line

Overall, the need-based investment approach or the financial planning approach for planning your savings is how all investments should be. A structured and goal-oriented method of managing your finances offers a lot of benefits and advantages and holds the promise of transforming your financial journey in life. However, to do so just by yourself would be difficult., hence do connect with us for the best SIPs @ jrswealth.org / +919881142430. We have a strong track record of creating wealth for our clients through SIPs.