need tips for young newbie investors – are FDs and SIPs sufficient? How to pick SIP funds? How do VIPs look?

POSTED BY anon smith ON August 8, 2012 9:34 pm COMMENTS (11)

Hi,

I believe it’s best to have all the necessary ammo before getting any financial planning done. I’ve read a bit about SIPs and FDs and have a few questions:

1) Assuming we won’t get enough time usually to follow the markets, etc. I think SIPs for the long term and FDs for shorter terms are the best options for such people. Am I overlooking other promising investment tools – perhaps like gold, etc. or are they somehow covered in SIP?

2) is a 15% CAGR a conservative estimate for SIP for 10-15 years? Is it higher/lower based on anyone else’s experience here?

3) How do I research what SIP funds to invest in? I was browsing around some investment sites and there are about tens to fifties of MF funds! I think there are deeper problems here, similar to picking up stocks:

 3.1) A diverse portfolio – I think there are debt, equity, gold. Is it considered bad to invest 33% of your monthly investment in each type? Also within each type, is a diversification necessary? I think diversification in investment is already handled by any single fund. Is there any harm in investing in too many SIPs, by keeping the total monthly investment constant, of course.

3.2) Timing the market – does it make any sense here? I expect better returns when markets are in a slump – “buying low and selling high”…right?(during the initial buying/investing of a fund)

3.3) Are there any websites to know how SIPs performed, get a list of the top performing SIP funds in the last decade, etc? 

4) Lastly, what are your thoughts on VIPs? http://articles.economictimes.indiatimes.com/2011-05-23/news/29568997_1_investment-plan-investment-strategy-total-investment

PS: assuming this applies to investors younger than 23. I expect the portfolio to change with age. 

Thanks in advance for your inputs.

11 replies on this article “need tips for young newbie investors – are FDs and SIPs sufficient? How to pick SIP funds? How do VIPs look?”

  1. anon smith says:

    @Manish,
    Sorry for the delayed reply. I was reading about and stumbled on this page: http://localhost/jagoforum2/how-is-capital-gains-tax-calculated-on-sip-investments/1675/

    This is what I understood from your comment: equity SIP is tax free. So assuming a CAGR of 12%, I don’t see how it goes to 8-10% range. Are there other taxes I need to consider, apart from capital gains tax?

    @Ashal,
    I understand that 2-3 years, we need to go for pure debt, and for long term, equity is much better; however, did you mean debt investment as in from FDs or debt-based SIPs? Is it wise to invest in debt-SIP for as short as 3-4 years instead of FDs?

    1. Dear Anon, you should go for SIPs in Debt funds.

      Thanks

      Ashal

  2. anon smith says:

    @Manish
    absolutely true, playing it pessimistically and safe is my philosophy too! 🙂

  3. anon smith says:

    @Ashal,
    Thanks for the reply. I know that it’s pre-tax, but simple-interest??? all this time, I was under the assumption that FD interest rates were compound interest! this is news. I guess I can make it work like compound interest, by re-investing 1 year tenure FDs every year, in that case, it doesn’t make a difference though I believe.

    My investment plans for now are just 1 year FDs (with re-investing after taking a bit) and 15 year-20 year SIP investments. I am still optimistic that SIP returns turn out much better than 12% CAGR

    1. Dear Anon, please don’t misunderstand me. The simple interest is the yield for those 13 or 14% figures.

      Please do note the FD interest is indeed compounding qtly but the figures quoted as 13-14% rate are simple interest yields.

      For short term say 2-3 years, one should go for pure debt. For long term say 15-20 years, one should go for Eq.

      Thanks

      Ashal

  4. anon smith says:

    sorry for the previous comment..I was looking at some irrelevant tables..didn’t notice that those interest rates were for senior citizens.

    1. Dear Anon, just a small correction in your understanding, the figures quoted by you for FDs are not CAGR but the Yield based upon simple interest formula & that too pre tax maturity amount.

      Thanks

      Ashal

  5. anon smith says:

    Thanks a lot for the insightful answers.

    Nevertheless, I must admit that I was slightly disappointed at Mr.Manish’s 12% quote for SIP..I just read in the paper today that SBI is giving 11.98% for 3 years, 12.98% for 5 years and an amazing 14.35% for 8 year tenure FDs!

    I also did some research on SIP calculators..turns out some options like DSPBR have a greater than 20% XIRR (assuming it’s the same as CAGR)…I also heard they can be as high as 35% (although I believe such cases are rare)

    I am compelled to believe that if Mr.Manish was not expected to be pessimistic (12% being the average case), it might be wise to have a significant portion of my portfolio into long term FDs.

    However, I am not sure about the tax implications (comparing the 12% average case in a 10-15 year SIP to an 8 year FD)

    1. Also you didnt realise that those returns are mostly “before tax” .. and after paying tax it will be again in 8-10% range .

      Note , you can not get disappointed when I say truth 🙂 . I could have said 15% of 20% , if you would have taken action on that and lost money , it was not a great situation either , getting disappointed right now is much better 😉

  6. Ramesh says:

    Manish has pretty much summed it up greatly.

    I would say, the long term expectations has to be very flexible and ranged. I would put that as +(2-5)% over inflation for equity and (1-3%) below inflation for debt portfolio.

    Yes, you make most of your money when you buy in the bear markets, only problem is that you do not know it at that time. (Flip it over during the bull markets).

    VIP is just complicated. Keep life simple.

    Valueresearchonline.com also has SIP calculators for all funds and durations.

    I would say, even 1 or max 2 fund are more than enough in terms of diversification. ‘

    Diversification into various assets should be based on the longer term future prospects of the asset (not the recent past returns only, understand the history of behavior of various assets), and your own requirements.

    Keep learning and start investing.

    Ramesh

  7. 1. Your thinking about this point is 100% right , SIP for long terms and FD’s for short terms

    2. Expectations makes us sad , 15% is possible , but i would suggest 12% as a right expectations , anything about that is a bonus . Do not take 15% , just expect it 🙂

    3. Yes thats a big issue , I would say pick a fund which has done better from last 3,5,7 yrs consistently , while past performance is no indication of future returns , this is what you can do with minimum effort , anywyas you should be reviewing them next year

    3.1 – Dont over diversify – just pick 3-4 mutual funds , and thats all you need . I am assuming you are doing it for 3-5 yrs atleast , pick pure equity diversified funds. HDFC equity, DSPBR top 100 , Franklin Prima Plus are some good one’s

    3.2 You are not into stocks , that you need to time the market, given you want to involve less, just do SIP , thats all .. dont try to time it .

    3.3 Yes there are many – one of them is this http://www.bluechipindia.co.in/BcWeb/Products/MutualFund/frmSIPCalc.aspx , you will get the return generated in a period

    4. VIP is a new concept , but not many funds have it , i would suggest for now skip it , dont over complicate . Read it for future .

    Manish

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