Choose the right SIP amount to reach your goal

SIP or Systematic Investment Plan is a disciplined way of investing in mutual funds wherein you can invest a fixed amount of money in mutual fund schemes of your choice at a fixed interval (it may be daily, weekly, fortnightly, monthly or quarterly). You can decide the amount; select the SIP date/s offered by the AMC and the scheme/s in which you wish to invest. However, many people perceive that SIP is different than mutual fund investments. The fact is that SIP is not an investment product but just a way of investing in mutual fund schemes. Other than by way of SIP, you can also invest in mutual funds in lump sum amounts.

You must have heard that SIP investing is for the long term and also that you can reach your financial goals by investing in mutual funds through SIP route. While there is no denying the above fact, the reality is that simply investing in mutual funds for long term via SIP may not help you achieve your financial goals.

Then what will help you achieve your financial goals? It is the ‘right SIP amount’

What is the right SIP amount?

To decide the right SIP amount, you need to know the following –

  • What is the financial goal amount at current cost
  • After how many years you want to achieve your goal
  • What is the average inflation rate
  • What would be the future goal amount after accounting inflation
  • What is your return expectation on mutual fund investments
  • Know the SIP amount to reach the inflation adjusted goal amount

Let us understand through an example

Papia wants to invest in equity mutual funds through SIPs for building her retirement home after 15 years from now. The current cost of her retirement home is Rs 50 Lakhs.

We now know the current cost of the goal amount and the number of years remaining to reach her goal.

Now we will apply average annual inflation of say, 7.5% over 15 years. Therefore, the inflation adjusted goal amount would be Rs 1.48 Crores! Therefore, Papia needs to invest for achieving the goal amount of Rs 1.48 Crores! And not Rs 50 Lakhs!!

So what would be right SIP amount to reach the above goal? Here we need to apply the expected rate of return from her SIP investments. As she is investing in equity mutual funds, we can assume 12% annual return rate over the 15 years period. Papia needs to invest Rs 29,500 per month in an equity mutual fund scheme, to reach the goal of Rs 1.48 Crores.

Therefore, the right monthly SIP amount to reach the above goal of Rs 1.48 Crores is Rs 29,500. Her SIP amount would have been only Rs 12,000 if she had not accounted the inflation adjusted goal amount. But that would not help her reach her financial goals. This clearly proves that random investing in SIPs will not help you reach your financial goals.

Conclusion

It is a well-established fact that investment in mutual funds through SIP works better in the long term. However, you must note that just because the SIP investment may work in the long-term, it does not mean that you will be able to achieve your long-term financial goals. The long term SIP investing may work only if you invest in the right SIP amount for the inflation adjusted goal as shown in the above example. Doing random SIP investments will not help meet your goals!

We suggest that you start a SIP only after knowing the ‘Right SIP Amount’ and Just stay invested during the goal investment period irrespective of the market going up or down. By doing so, you end up getting more units when the market is low and fewer units when the market is high. This, help accumulating units at lower average cost per unit over time which is known as rupee cost averaging.

Choosing the right SIP amount and continue the investments for the desired period may help you reach your financial goals.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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