An increasingly popular vehicle to invest in mutual funds, systematic investment plans (SIPs) have struck a chord with retail and seasoned investors alike. As per data from the Association of Mutual Funds in India (AMFI), there are about 3.88 crores SIP accounts in the country through which investors invest in their chosen mutual funds.
While SIPs imbibe a disciplined savings habit and help in wealth creation in a disciplined and sustained manner, often investors fail to zero in on the right SIP amount. In other words, they fail to gauge the amount they should invest via SIPs. If you are also facing a similar dilemma, this article will help you calculate the right amount.
There’s no fixed formula to decide the right SIP amount. This is because we all, as individuals, are different in terms of income, liabilities, and financial goals. Having said that, a clear understanding of these things will help you figure out the required amount.
A goal-based investment approach is one of the success mantras. Prior to deciding the SIP amount, you need to analyse your goals and have a holistic understanding. This will help you distribute the SIP amount for each.
Classify your goals in three broad buckets - long, medium, and short-term. Long-term goals are the ones that are still a good 15 to 20 years away. Objectives that you want to achieve in 3 to 5 years can be classified as medium-term, while short-term are the ones that you seek to achieve in the next 6 months to 1 year.
Higher education of children, their marriage, and your retirement are typically long-term goals. On the other hand, buying a house or car falls in the category of medium-term goals. Building an emergency corpus or saving for a vacation are under the ambit of short-term goals. You can figure out the SIP amount after noting drawing a clear picture of these goals.
Once you have noted down the goals, it’s essential to get an estimate of the amount of money each goal requires. While doing so, it’s important to factor in inflation, which erodes the value of money with time. This is especially true for long-term goals.
For instance, if the cost of higher education for your child is ? 10 lakhs today, assuming an inflation rate of 5%, the same will be over ? 26 lakhs 20 years down the line. Many online calculators can help you figure out the amount you would need for a particular goal and compute the SIP amount accordingly.
This is another essential parameter to consider. Investment horizon refers to the time period until which you wish to remain invested. A long investment horizon and an early start not only lowers the SIP amount but also allows compounding to weave its magic. The table given below illustrates this fact*:
|
Goal Amount |
Period of Investment |
Annualised Rate of Returns |
SIP Amount Per Month |
|
? 26 lakhs |
20 years |
10% |
? 3,423 |
|
? 26 lakhs |
10 years |
10% |
? 12,692 |
*Numbers are for illustrative purposes. Actual figures may vary
As evident, if you delay your investments, then the SIP amount will increase significantly. So, it pays to be an early bird.
Keeping in mind these parameters will not only help you decide the right SIP amount but also make the necessary tweaks that will help you achieve your goals with ease.
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