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Edelweiss Insights SIP: A tool for your clients' financial needs

SIP: A tool for your clients' financial needs

How to use SIP to fulfil different financial goals of your clients.
Shreeta Rege Jul 23, 2018

When I was young, I remember reading the story of the deaf frog. For those who do not know this story, a brief primer may not harm. While playing, five frogs accidently fall in a pit. Witnessing the incident, a few animals rush to the edge of the pit and are happy to see that the frogs did not suffer any injuries. One of the bystanders encourages the frogs to jump out of the pit. Soon other animals start cheering them. Enthused, they start jumping but are unable to reach the edge.

While the bystanders initially cheer, as afternoon nears and it starts getting hot, the bystanders lose hope and start murmuring that it is impossible to jump out of the pit. Hearing these whispers, one by one, the frogs stop trying. However, one frog refuses to give up. He tries harder until with a giant leap he jumps right out of the pit.

All the animals are surprised and curious to know how he managed the feat. It is then they come to know that the frog is deaf.

In investing too, market news influences investors. Investors might be tempted to put all their savings in equities during a rally. On the other hand, market corrections make investors wonder if they are on the right track. Investing successfully to achieve financial goals requires your clients to adopt the ‘deaf frog’s approach. They need to tune out market news, focus on their goal and stick to their financial plan.

SIP is an excellent tool, which allows your clients to do just that. Investing a small amount regularly helps your clients achieve their financial goals.

As the investment amount is fixed, clients are not tempted to time the market by varying their investments based on market news. Also, thanks to volatility, your client gets more units during market fall.

Here is how you can use SIP in to fulfil financial goals of your clients:

Buying a car (A near term goal):

For a client's near term goals, a SIP in debt fund is a good choice. Based on your client's risk profile you can recommend liquid or low to short duration funds. Having low to short duration investments lowers the impact of interest rate movement on the client's portfolio.

You can also recommend these funds to your other clients having other short-term goals such as annual holidays fund or refurbishing house.

Child’s education (A medium term goal):

Child's education generally tends to be a medium term goal. Usually people start planning for child's education five to ten years in advance. For this time horizon, hybrid funds are a good investment choice.

These funds invest in a mix of equity and debt. While equity portion acts as catalyst, fixed income portion helps provide stability to the portfolio.

Clients wanting to save for their child’s education can systematically invest in aggressive hybrid funds or balanced hybrid funds depending on risk profile and time horizon.

Your clients can also invest through SIP in these hybrid funds for their other medium term financial goals like children wedding.

Retirement planning (A long-term goal)

Retirement planning is usually a long-term goal. You must be advising your clients to start early to fund their post retirement days. When there is no immediate need for cash flows, you can recommend SIPs in equity funds to your investors. Investments in equities helps shield the retirement corpus against inflation.

Your clients can consider SIPs in large and midcap funds or a multicap fund for retirement planning and other long-term financial goals.

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1 Comment
Prakash a. Penkar · 2 months ago
Fantastic article .
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