Small but regular investments go a long way in creating wealth over time. Systematic Investment Plan (SIP) is an ideal way for retail investors to benefit from the power of compounding.
Lovaii Navlakhi, MD & Chief Financial Planner, International Money Matters Pvt. Ltd advises investors to use the SIP route to reduce risk. For the purpose of saving tax, Navlakhi proposes investing in ELSS schemes of mutual funds with a three-to-five year time frame.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: An investor can invest Rs 4,000 per month. How should he allocate the money?
A: The investor has written that he is already doing Rs 4,000 a month in PPF, which means Rs 48,000 is going there which also gives him some tax saving and he wants to do another Rs 4,000 per month. So essentially, if he is looking at saving tax, there are two options for him, one is to look at something in the space of life insurance. But since he has mentioned he has adequate insurance and he has a three-to-five year time horizon, maybe investing in equity linked saving schemes is a good bet for him and doing in through an SIP route or a monthly investment will also reduce his risk. So ELSS schemes of mutual funds are good bets off the curve, possibly HDFC Tax Saver, Sundaram Tax Saver and Franklin Templeton Tax Saver are some of the names that come to mind, but I think a good number of them are performing well in the market.
Q: What kind of a return can he expect on this with a Rs 4,000 monthly investment?
A: The returns typically are linked with what happens in the marketplace and we have seen the last four-five years have been extremely volatile. But we have seen that even in these volatile times, if I look at a five year time horizon, getting a return of say 12% compounded annually may not be so difficult. So we should target for something in that range above 12% per annum compounded. If he makes more, which could happen, that