Mutual Funds Strategy 117: Disciplined Investing for Business Owners
You are already aware that the most disciplined investment instrument is the SIP (Systematic Investment Plan). SIP has single-handedly created the maximum crorepathis in India even without their knowledge. Just imagine, someone made a standing instruction to debit an amount from their bank account and invest in mutual funds, which are sitting at massive returns right now.
SIP investors may check their portfolio value daily in the initial 1 to 2 years; after that, they may check it once a month. After 5 to 6 years, even if they check it once in 6 months, it’s a surprise. I am sure 99% of these investors would have built their wealth passively. This is why mutual funds are so powerful; they have an active fund manager who allocates these incremental funds to some stocks/assets that they feel will give a better return.
SIPs work best for regular income earners. In the early 2000s, the IT, BPO, Banking, and Financial services industries experienced an economic boom, creating thousands of regular income-earning employees. The mass market adoption of mutual funds was possible due to one innovative product— the SIP. If you asked these job goers to invest manually, they would not have done that. Even if you ask them today, 25 years later, they will still not do it.
SIP works because it is automated. If it were a manual process, most of them would have skipped it and used the money for something else. This brings us to the important crossroads on how the business owners or self-employed professionals will invest. They neither have a regular nor a predictable income.
The total annual income of these business owners or self-employed professionals could be higher than that of the job goers, but the uncertainty of income rules them out from an automated SIP debit.
This question has haunted me a lot, because more than 90% of my customers are self-employed. I understand how troublesome it is to set an SIP but later see that getting rejected due to a lack of funds. Every business owner requires working capital to meet their daily business needs, so it is not always guaranteed that their accounts will have sufficient balances when the automated debit instruction is triggered.
You can see the error message “Insufficient funds”, but trust me, these are some of the finest business people handling multiple projects at the same time and doing decent business volumes. After noticing these failures, they usually call me up the next day and ask for a lumpsum payment link, which I manually provide.
This kept me thinking, and finally, I was able to come up with a solution. Keep a token SIP for every month and then ask them to do a manual top-up when they have funds.
Let me explain it with an example.
- Create an SIP on the 10th of every month for Rs500.
- Ask the client to top up the same on the 11th, if they have sufficient funds in the bank.
Automating a monthly debit of Rs 500 is not a big deal at all. Every one of you can afford to invest that much with 100% confidence.
- When you have a surplus month, consider adding more to your investment. You can either top up the same fund for any amount of your choice, with a minimum of Rs5000.
- If you have a deficit month, then disregard the additional contribution part.
If you notice Fig 117.3, you can find the total income of the investor to be 14.07 lakhs, of which he is able to save 27.43% per year, i.e. 3.86 lakhs. In the months of January, March, May, October, and December, his net disposable income was less than Rs 10,000; therefore, he decided not to top up the mutual funds. Even then, his minimum SIP of Rs 500 was getting invested automatically.
The income pattern depicted above is typical of what self-employed individuals experience. Sometimes their monthly net income could be less than a threshold or even negative, but this does not make them a failure. My improvisation of having a definite Rs500 getting invested monthly will keep them in the hunt. When a surplus month comes in, they will be able to outdo a regular income competitor.
This is the only way a self-employed person can become a disciplined investor. After 2 to 3 years, these funds and their performance will provide them with good incentives to continue.
That’s all for today and I hope this article helped you with a fresh new perspective. You should consider sharing this with your friend or relative who could benefit from this.
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