Feeling fed up with the so-so returns from your SIPs? You're not alone. Many investors find themselves caught in a cycle of minimal gains, which hardly outdo the inflation rate. It's like running on a treadmill – a lot of effort, but you're not really getting anywhere.
Let's paint a picture of a typical SIP journey: It brings in a 37% return after 5 years, with the market doing its thing at an annual rate of 12%. This might sound okay, but it actually boils down to a rather unimpressive Compound Annual Growth Rate (CAGR) of just 6.5%. It's a clear sign that sticking to the "safe" path in investments might not be the best strategy if you're looking to significantly grow your wealth.
But what if there's a different route that could potentially bump up your returns to about 51% over the same period? This involves a smarter blend of the stability offered by Fixed Deposits (FDs) and the growth prospects of Mutual Funds. Here's how you can break free from those mediocre SIP returns, especially if you have a lump sum of say ₹3 lakhs ready to invest.
Step 1: Lay a Solid Foundation with FD Laddering
Begin by allocating ₹60,000 for the first year's SIP, breaking it into monthly investments of ₹5,000.
Then, take the remaining ₹240,000 and divide it into four equal FDs of ₹60,000 each, set to mature one after the other from the first to the fourth year.
These FDs should aim for a 20% total return, which, after a 30% tax on the interest, would translate to a net gain of 14.7% over 5 years.
Step 2: Make a Growth Jump with Mutual Funds
As each FD reaches maturity, roll the proceeds into your SIP, continuing with the monthly ₹5,000 but now directed into Mutual Funds.
Assuming a 12% annual growth from these funds, aim for an extra 37% return over the five years.
Breaking Down the Numbers
From FDs
Investing ₹240,000 in FDs could lead to a post-tax return of 14.7% over five years.
From Mutual Funds
Starting with a monthly SIP of ₹5,000, and fuelled by the maturing FDs, you're looking at a 37% return over the same period.
Combined Potential
14.7% from FDs plus 37% from Mutual Funds equals about a 51.7% gain, rounding up to 52%.
Why This Mix Makes Sense
Stability from FDs: They provide a reliable return, serving as a safety cushion during times the market dips.
Higher Potential with Mutual Funds: Offers a chance for better returns than what SIPs alone can achieve, particularly in favorable market conditions.
Flexibility: You can choose Mutual Funds based on current market trends and your own appetite for risk.
Enhanced Compounding: Reinvesting FD returns into Mutual Funds boosts the overall growth of your investment.
Considering Just FDs?
Going all-in on Fixed Deposits might seem tempting as a straightforward path to over 50% returns. However, after taxes, you'd be more in the ballpark of the 37% returns that Mutual Funds offer.
Key Takeaways
Regular investments in Mutual Funds are crucial for seeing substantial growth.
While Mutual Funds come with their share of risks, FDs offer a balance with their stability.
Choosing the right Mutual Funds is important – stay informed and pick ones that align with your investment goals and market outlook.
Start your Mutual Funds Investment Journey with Himani Chaudhary
Disclaimer
Remember, this is a simplified guide to offer a new perspective on managing your investments, especially with a lump sum at hand. It's always wise to consult with a financial advisor to tailor an investment plan that suits your needs and financial goals best. This isn't financial advice, but a nudge towards exploring how you can make your money work harder for you.
Comments