What is the similarity between taking a home loan, buying pension products and investing in public provident fund? Despite being different, the three share a similarity – they need a fixed, monthly or yearly contribution for long-term. Products like the above may give decent or poor returns, but are still popular among investors.
Now take the case of equated monthly instalments (EMIs) on loans. A loan is a liability, and must be always avoided, according to old, tested advice. But a loan taken for buying a home is not considered as a liability, but rather, an investment. Paying your home loan EMIs is treated as normal, or even a good use of one’s income.
These anecdotes mean that products requiring long-term financial commitments work well for the human psyche, even if there are financially advantageous alternatives.
Consider an alternative like mutual funds. MFs have blown up in popularity in the developed world for their ease in connecting idle money to difficult investments. Unable to choose a good stock to buy? Relax and let a fund manager work that for you. Hear about high returns in the bonds market but have no idea how to access it? Debt mutual funds will help you access this.
Mutual funds open up hard-to-access markets and big ticket-size products to the lay investor. Today, opening a mutual fund account and beginning your investing journey is as simple as signing up on an e-commerce site and purchasing goods.
Despite the ease and convenience, many investors still fear about putting a large sum into funds. The tagline Mutual funds are subject to market risks make investors jittery, amplifying their risk aversion to products that have proven to generate wealth for millions of investors home and abroad.
To change this outlook, mutual funds let investors contribute a fixed amount into their favourite schemes on a recurring basis. The SIP (systematic investment plan) has become synonymous with mutual funds, even when its underlying approach is similar to recurring bank deposits.
Franklin Templeton India went a step further in communicating the benefits of mutual funds and SIPs to the Indian masses. The fund house prefers to explain the benefits SIPs as ‘good EMIs’. Franklin India MF says that just like people choose EMIs for today’s big expenses, they can choose SIPs for fulfilling tomorrow’s dreams.
A good EMI i.e. an SIP into mutual funds is the opposite of loan EMI, which is a liability. Those who pay their loan EMIs could simultaneously also contribute to mutual funds and build a future asset. Franklin India MF has illustrated the benefits of this balanced approach.
From the above example, the growth in the investments done through SIPs can potentially recover the payments made to repaying the home loan. Means you can have your cake and eat it too!
For those confused on how it works, SIPs let you invest in a mutual fund scheme on a fixed, recurring basis. SIPs work well for investments that are deemed risky, or where it is not the best choice to invest a large sum at once. Equity investments are a favourite for SIPs. But this does not mean SIPs do not work in less risky, safe investments like liquid schemes.
SIPs do a lot more than manage investment risks. SIPs inculcate a savings habit among investors, and train a person to be disciplined and patient. The best thing about starting an SIP is that it can be started for as low as Rs500 in Franklin India MF’s schemes.
Importantly, it does not take a good credit score or solid professional background to be eligible for investing in mutual funds. Anyone can start an SIP into mutual funds for self, or do it on behalf of their loved ones.
Considering the benefits of SIPs, one may now ask how much they should invest in an SIP. Franklin India MF offers a way to calculate the SIP amount using the
SIP calculator i.e. the good EMI that would help you reach your life goals.
If your investment plan is for a long-term, say, over five or seven years then consider a 12% return on a risky asset class like equities. If the goals are near, or within five years, then have a conservative expectation of 7% to 8%, for an asset class like debt funds. Following these handy steps would help you find the good EMI to begin your investing journey.
