Start Investing in SIP and Plan Your Dream Vacation
Vacationing abroad at an exotic location is a dream that most of us share. But, given the unaffordable costs involved, we postpone it till an opportune time arrives. How can one fund an international trip without disrupting our financial future? Because, unless we plan our budget, the expenses of a vacation can our finances.
Let’s look at how you can plan your dream vacation and fund it with a SIP.
But first — a crucial question:
How much should I save for a dream holiday?
The amount of savings need to be first allocated towards many important family goals such as buying a car, purchasing a house, saving for your retirement, your child’s education, etc. Once you have set aside funds to work towards these goals, you can decide the amount you need to save for your dream vacation.
For example, a vacation to Europe for a family of four costs approximately Rs. 8 lakhs. Assuming a yearly inflation rate of 6% and 5 years to achieve this goal, it is safe to consider the actual cost would be around Rs. 10.70 lakhs. So, the monthly investment required works out to around Rs. 12,500 at a return of 15% p.a.
How to invest in mutual funds and where to invest?
Most families generally plan a holiday only a year before. You can start an SIP and invest in direct plans of ultra-short-term funds. You can expect an annualised return of 7% to 8% on these funds. If you are confused between SIP v/s lumpsum, you may want to know that most fund managers advise not to invest in lumpsum.
Even when you plan your holiday 3 to 4 years in advance, balanced advantaged funds and short-term funds can be ideal based on your tax-slab and risk tolerance. While balanced advantaged funds could generate over 9% returns p.a., short-term funds can be expected to generate 8% to 9% returns.
For investment horizons of more than 3 years, you can invest in multi-cap funds and large-cap equity funds.
Why SIPs are better than EMIs?
Let us look at an example to understand why saving through SIPs makes more sense.
Assume you spent Rs. 1.5 lakhs on a holiday. Convert your credit card dues into an EMI for 12 months at 13% p.a. and you would have paid Rs. 1,60,771 to the bank. You paid nearly Rs. 10,800 more than the actual cost of your holidays.
Whereas for SIPs, if you invest Rs. 12,050 monthly in a liquid debt fund (Rs. 1,44,600 a year) at a return of 7%, you can get Rs. 1.5 lakh after a year.
You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus.
Activating Systematic Transfer Plan (STP)
When you have built your holiday corpus through equity funds, you can enable an STP in your existing funds. This is how SIPs outdo lumpsum investments. STPs transfer a pre-determined amount from your equity funds to low-risk ultra-short term debt funds at regular intervals. This helps reduce the market risk of your portfolio.
You may not want to activate a Systematic Withdrawal Plan (SWP) in your fund. When you opt for an SWP, the pre-determined amount gets credited to your savings bank account and generates lower returns than ultra-short term funds.
Conclusion Thus, you can invest in mutual funds through SIPs to plan your finances systematically. It is imperative to keep your investments in sync with your goals so you understand how much to save.