Thanks to advanced technology and increased popularity of mutual funds and systematic investment plans (SIP), investing in SIP is now a cakewalk. Investing in mutual funds is a smart investment approach as your money is automatically invested on a periodic basis. This instills a sense of financial discipline which is important in investing. Experts claim that specific investment amount such as Rs 5435 are prone to achieve better results than a random investment amount such as Rs 5000. This is because the former is likely to be achieved after proper back calculation and analysing one’s investment portfolio. Hence, they are likely to be continued even during high levels of market volatility. This article aims to act as an SIP investment guide in deducing the right SIP investment amount for your investments.
SIP for specific financial goals
If you have clear, specific, defined financial goals, you’d be able to easily deduce the amount of money required to invest in mutual funds to achieve your financial goals. Typically SIP investments are ideal for long-term investment horizon. Why, you may wonder. It’s simple. When you invest in SIP for a prolonged duration, you invest in different market cycles that helps to lower the volatility associated with mutual fund investments.
Let’s understand this with the help of an example. Say, you wish to accumulate a corpus of Rs 50 lacs to finance your child’s higher education. You have 20 years to achieve this amount. Now, using the SIP calculator you can calculate that you’d need to invest around Rs 5,054 in a scheme that offers an average returns of 12% p.a. Note, that you might want to adjust this amount to inflation to achieve a truer picture.
You can follow this approach for calculating the SIP amount for all of your financial goals, whether short-term or long-term. Note that, it is recommended that your savings should amount to at least 30% of your annual income. This percentage is inversely proportional to your age. For instance, if you invest in20s, due to fewer financial commitments and responsibility, you can invest as high as 60 to 70% of your income. If your savings account to less than 30% of your income, you can top-up it up with the remaining amount and use that amount towards capital appreciation. If you are unable to invest even 30% of your salary, you might want to reconsider your expenses and cut back on them.
SIP for capital appreciation
If you have allocated money for all your long-term investment goals, it might get a bit difficult to evaluate the amount needed to invest to grow your capital. Usually, when you choose to invest in SIP solely for the purpose of wealth creation, it is assumed that you are doing so to ensure a certain lifestyle post retirement. If you have invested money in all of your financial goals, and have an emergency fund in place, you might consider investing the entire amount in equities and equity-related securities.
Whether you are investing in mutual funds to achieve a specific goal or to generate wealth in the long-term, it’s necessary to take some time and plan your investments. Happy investing!