Short-term financial planning: How SIP for 2 years can help you achieve your goals

Financial planning is crucial whether you are planning for the short-term or the long-term. Adequate investments tailored to your specific needs and time horizon can potentially help you accumulate the required corpus to fulfil your financial goals and secure your future. A suitable investment option for short-term financial planning is the Systematic Investment Plan (SIP). While SIPs are usually considered for long-term financial planning, they can help in short-term investment planning too. Read on to learn how.

Table of Contents:

• How SIP for 2 years can meet your requirements
• How to choose a suitable SIP for 2 years
• Evaluating a suitable SIP for 2 years
• The key benefits of investing in an SIP for 2 years
• Why choose SIP for 2 years over shorter tenures
• Step-by-step process to start SIP investing
• Key factors to consider for SIP for 2 years

How SIP for 2 years can meet your requirements

A Systematic Investment Plan or SIP allows investors to invest small, fixed amounts periodically (weekly, monthly or quarterly) into a mutual fund scheme. The key benefit of SIPs is that they allow you to invest smaller regular sums, instead of having to put in a large lumpsum amount, which makes goal-based investing affordable, accessible, and easy to adhere to. For short-term financial goals with a timeline of 1 to 2 years, an SIP of 2 years can be suitable as it provides the benefit of compounding over a relatively extended period, potentially helping you to accumulate the targeted corpus required to meet the goal.

For example, if you want to accumulate Rs. 2 lakh in two years (say, for an international vacation) you can invest a suitable monthly amount that you can afford in an SIP mutual fund with a track record of providing a reasonable return potential.

Moreover, the SIP route of investing also enables rupee cost averaging. Since the SIP amounts are fixed, you will buy more mutual fund units when the Net Asset Value (NAV) is low and fewer units when the NAV is high. This averages out the acquisition cost per unit and helps investors to tide over market irregularities over the long term.

How to choose a suitable SIP for 2 years

Selecting a suitable SIP for 2 years for your specific financial goals requires some research and due diligence. Most importantly, your SIP investment horizon should match your financial goal timeline. For example, it is feasible to opt for an SIP for 2 years if your goal is 2 years away.

Next, decide the monthly or quarterly SIP contribution amount based on your financial situation and the total corpus you need to accumulate. Also, factor in the expected SIP returns. For example, if your target amount is Rs. 3 lakh in 2 years, it may be suitable to invest around Rs. 11,500 monthly in an SIP providing a 10% annual return potential (For illustration purpose only). You can make use of an online SIP calculator to decide you SIP investment amount.

Most importantly, choose a mutual fund scheme category that aligns with your risk appetite and return expectations. Actively managed diversified equity funds like flexi cap fund can be a suitable option for aggressive investors. Conservative investors, on the other hand, can consider debt funds, which offer relatively lesser volatility compared to equity funds albeit with a lower return potential.

Reviewing the performance of your chosen SIP fund periodically is also crucial. One must periodically check if the fund performance is on track to deliver the targeted returns. Make changes only if required, but don't stop your SIPs midway because staying invested for the full 2-year tenure is key to compounding gains.

Evaluating a suitable SIP for 2 years

• Aligning goals: When evaluating SIP for 2 years, it is crucial to assess how well they align with your specific financial goals, risk tolerance and return expectations. The first step is to be clear about your investment objectives and time horizon. For short-term goals like buying a car or home down payment with a 2–3-year timeline, equity-oriented hybrid funds such as multi asset allocation funds can be suitable.
• Assessing fund track record: Analyze the historical return performance of shortlisted funds over the past 5-7 years. Consistently higher inflation-adjusted returns may indicate a potentially suitable fund. Opt for funds with a relatively stable performance across market cycles with a level of volatility that aligns with your risk appetite.
• Fund structure: Study the investment strategy and portfolio composition to evaluate if the SIP mutual fund aligns with your goals. Actively managed diversified equity funds that follow a disciplined investment process can be a suitable SIP for 2 year options. Evaluate whether the fund has delivered risk-adjusted returns over a timeframe with a healthy portfolio mix of high-quality companies across sectors.
• Cost: Check the expense ratio of funds as it directly impacts net investor returns. Also, analyze the exit load structure to avoid early redemption charges. Choose plans with lower expenses and optimal exit load.
• Review and adjust: Optimize your SIP investments by selecting a date aligned with your income cycles. Set up alerts for timely updates on SIP debits, statements and performance. Review periodically to check if your fund is on track to meet your expected returns.

The key benefits of investing in an SIP for 2 years

Investing in SIPs for 2 years has several potential benefits compared to short-term investments of 1 year or lesser duration.

• Can potentially help accumulate the required corpus for short-term financial goals like vacations, car down payments, family functions, etc. in a disciplined manner.
• Promotes the habit of regular investing and financial discipline compared to one-time investments. Investing every month over 2 years inculcates healthy investment habits.
• The power of compounding has more time to work when you stay invested for 2 years rather than just 1 year. This boosts overall gains.
• Rupee cost averaging enables buying more mutual fund units when the NAV falls during periodic market corrections and declines. This brings down the average acquisition cost per unit.
• Potential to earn inflation-beating returns through equity funds for investors with a relatively higher risk tolerance.
• The minimum investment amounts are often low, making SIPs affordable and accessible.
• Automated redemptions are possible upon maturity for goal realization.

Why choose SIP for 2 years over shorter tenures

The extended SIP tenure allows your capital to grow through the power of compounding to meet short-term needs. Also, it becomes easier to determine an affordable monthly SIP contribution amount that can potentially accumulate the required corpus over 2 years.

Equity exposure over 2 years can balance out short-term volatility in stock investments with the potential for reasonable returns over the tenure.
Make provisions to review and course-correct your investments if the SIP underperforms in the first year, instead of stopping investments. Taxation is favorable in the long term as gains are categorized as long term capital gains, and thus attract a lower tax rate.

Step-by-step process to start SIP investing

Follow these steps to start your SIP investment journey in a systematic manner

• First, thoroughly evaluate your financial goal, investment time horizon and approximate corpus required.
• Based on your risk appetite and expected returns, shortlist suitable mutual fund schemes for SIP investment. Compare aspects like past performance, portfolio composition, fund management team and expense ratios.
• Decide the ideal SIP tenure aligned with your goal horizon.
• Calculate the monthly or quarterly SIP contribution amount required to reach your target corpus. Account for the expected SIP returns in your calculations.
• Sign up online with your preferred AMC or mutual fund distributor after research. Complete your KYC documentation and link your bank account for smooth SIP payments.
• Finally, initiate your chosen SIP online by selecting the optimal SIP instalment date and amount. Choose email or SMS alerts to easily track your investments.

Key factors to consider for SIP for 2 years

• Evaluate your individual risk tolerance levels first. Your risk appetite will impact your fund category and options.
• Analyze the historical returns and past performance track record of your shortlisted funds. Check if they consistently delivered inflation-beating returns over 3–5-year periods.
• Study the investment philosophy and portfolio composition of your chosen funds. Actively managed diversified equity funds such as large and mid cap funds could be a suitable SIP for 2 years for relatively high-risk appetite investors.
• Check the expense ratio of funds. Some funds also have exit loads if redeemed early.
• Optimize your SIP date. Choose an SIP date (5th, 10th, 15th etc.) that aligns with your income cycles and liquidity. Set up SMS and email alerts to track your investments.

Conclusion

SIP for 2 years can be a potentially suitable avenue for short-term financial planning and goal achievement. The extended investment period allows your capital to benefit from the compounding effect to meet your near-term objectives. Equity and hybrid mutual funds can be suitable for growth-oriented investors, while debt funds may be considered by conservative investors. Starting early, investing regularly through SIPs, tracking fund performance, reviewing periodically, and remaining invested for the full 2-year term are crucial for making the most of your investment. Do thorough research and invest wisely in the right SIPs to potentially fulfil your financial aspirations.

FAQ's:

What is a SIP, and how does it work for short-term investments?

A Systematic Investment Plan (SIP) allows investors to invest a fixed amount regularly in mutual funds. For short-term investments, SIPs help manage market volatility by spreading the investment over time. Though typically used for long-term goals, they can also be effective for short-term objectives with careful selection of low-risk funds.

Are there tax implications for 2-Year SIPs?

Yes, tax implications exist for SIPs depending on the type of mutual fund. Equity SIPs held for less than 1 year are subject to short-term capital gains tax (STCG) at 20%. Long-term capital gain tax (LTCG) on equity SIPs are taxed at 12.5%. Debt fund SIPs are taxed as per income tax slabs.

Are 2-Year SIPs suitable for first-time investors?

For first-time investors, an SIP for 2 years can be a good start. It offers the benefit of rupee cost averaging, reducing the impact of market volatility. However, first-time investors should focus on low-risk funds and ensure they understand the associated market risks for this shorter investment horizon. However, SIPs for long-term can help in long-term wealth creation.

How do market conditions affect 2-Year SIP returns?

Market conditions can impact the returns of an SIP for 2 years. In volatile markets, the returns may fluctuate, but SIPs help mitigate this risk through rupee cost averaging, buying units at different prices. However, the shorter investment period means returns might not fully reflect long-term market growth trends.

What is the minimum investment for a 2-years SIP?

The minimum investment for an SIP for 2 years typically depends on the mutual fund's policy, but it usually starts at Rs. 500 per month. Investors can choose an amount that aligns with their financial goals and capacity, with flexibility to increase or decrease the SIP amount over time.

An SIP of Rs. 5,000 per month for 2 years: What would be the potential returns?

The potential returns from an SIP of Rs. 5,000 per month for 2 years depend on the mutual fund’s performance. Assuming an average annual return of 10%, the total amount invested would be Rs. 1,20,000, and the future value would be Rs. 1,33,337 (For illustrative purpose only). However, potential returns may vary based on market conditions. Tools like SIP calculators can help estimate the returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.