Planning A Holiday? This 12-Month SIP Trick Can Build Your Travel Fund

Travel is no longer something many Indians save for only when there is a wedding to attend or a pilgrimage to make. For younger professionals in particular, taking a break, exploring a new city or planning an international holiday has become part of the lifestyle.

But there is one problem. The desire to travel often comes before the money is ready.

For young professionals who are still building their savings, an upcoming holiday can put pressure on their monthly budget if the expenses are not planned in advance. Flight tickets, hotels, local transport, food and shopping can quickly turn a short trip into a sizeable expense.

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One way to avoid that last-minute financial squeeze is to start saving for the trip 12 months in advance.

A 12-Month SIP Can Build Your Travel Fund

Gaurav Garg, Head - Research, Lemonn, told NDTV that a 12-month SIP can work as a disciplined way to build a travel corpus, provided the money is invested in a product suited to a short-term goal.

"A 12-month SIP is a savings discipline dressed up as an investment, and that's fine, as long as investors pick the product accordingly. Put Rs 10,000 a month into a liquid fund or arbitrage fund returning about 6.5 per cent and you end the year with roughly Rs 1.24 lakh. About Rs 4,000 of that is returns. The remaining Rs 1.2 lakh is money you saved. The returns are a bonus. Protecting the principal is the actual job," Garg said.

If a person expects to take a holiday next September, they can estimate the total cost today and start putting away a fixed amount every month. For example, a Rs 1.2 lakh travel budget means saving Rs 10,000 every month. If the money earns some return along the way, the final corpus can be slightly higher.

This approach can work for both domestic and international trips. A person planning a Goa trip can use the same method as someone saving for a holiday in Thailand or Europe.

Why Equity SIPs May Not Suit A One-Year Holiday Goal

A regular SIP in an equity mutual fund may appear attractive because it can potentially generate higher returns over longer periods. But a holiday planned just one year away leaves little room to recover from a market fall.

"A SIP adds money every month, so by the last quarter nearly the whole corpus is invested. A correction just before your trip therefore hits almost all of it. A 10 per cent fall at that point would wipe out about Rs 12,000, three times what a liquid fund would have earned all year," Garg said.

He pointed to the recent market performance to underline the risk. According to him, the Nifty is down over 6 per cent year-on-year, while the Sensex is about 13 per cent below its December peak.

The problem is not whether the market will fall or rise. It is the timing. If the market falls just before the planned holiday, the investor may have to either postpone the trip or sell the investments at a loss.

There can also be tax implications. Garg noted that redeeming equity investments within a year can attract 20 per cent short-term capital gains tax, while some mutual funds may also have an exit load.

Work Backwards From Your Holiday Budget

The easier way to build a travel fund is to start with the trip rather than the investment.

First, estimate the cost of the holiday in today's prices. Include flights, hotels, food, local travel, sightseeing and shopping. For international trips, it is also useful to keep some additional money aside for currency fluctuations and unexpected expenses.

"The practical approach is to work backwards from the trip. Price it in rupees today and add a buffer, especially for foreign travel with the rupee near 96 to the dollar. Divide the total by 12 and automate that amount into a liquid fund or recurring deposit," Garg said.

So, if the estimated cost of a foreign holiday is Rs 1.8 lakh, adding a 10 per cent buffer takes the target to Rs 1.98 lakh. Dividing that across 12 months means setting aside about Rs 16,500 every month.

The advantage is that the holiday is effectively paid for before it begins. There is also less temptation to put the entire expense on a credit card or dip into an emergency fund when ticket prices rise. "Save equity for goals where time can repair a bad year," says Garg.