Finance Blog

HOW TO DECIDE YOUR SIP AMOUNT

Thanks to advanced technology, you can now invest in mutual funds online from the comfort of your house with just a few clicks. Same goes for SIP investment as well. Investing in mutual funds via SIP barely takes few minutes. All you have to do is log into the online investment platform – this could be either the mutual funds’ website or AMC’s (asset management company) website.

However, one aspect often makes the SIP investment journey difficult for investors – what is the right amount to invest in SIP? How to determine this amount? Should this be done on an ad-hoc basis or after careful analysis and precise calculation. The answer is dependent on what you wish to achieve from your SIP mutual funds.

SIP for well-defined and pre-determined financial goals

If you have already drafted a financial plan to reach certain financial goals, then you must calculate the exact amount required to invest in mutual funds via SIP to reach these goals.

You can do this by primarily determining and defining your goals. Post determining your financial goals, assign a time period to these goals – the time duration for which you can stay invested in mutual funds to reach these goals. Post this, determine the amount needed to achieve these goals. Now, assume and analyse a reasonable rate of your mutual funds, say 10 to 15%. Post this, you can use an SIP calculator to help you determine the SIP investment amount required to invest to reach a particular goal.

Let’s understand this with the help of an example. Ramesh wants to save for his daughter’s wedding. After careful analysis, he determines that he would need around Rs 70 lacs (after taking inflation into account). He has 15 years to accumulate this account. He invests in ABC mutual fund schemes that offer average returns of 12% per annum. Using SIP calculator, he’d find that he would need to invest around Rs 14,012 each month.

SIP to aid wealth creation

If you have already invested for all your long-term goals, then you might consider building your wealth. Usually, one focuses on wealth building and creation to suit their needs post-retirement and to continue a certain level of lifestyle. In such scenarios, should you invest in mutual funds via SIP on an ad-hoc basis? Experts suggest that it is always helpful to take some amount of precision when investing in mutual funds via SIP, even if it’s for wealth creation.

Ideally, you must save and allocate a minimum of 30% of your salary or income towards mutual fund investments. If all your financial goals are taken care of, and you have a good and healthy emergency corpus in place, then you might consider investing in equities or equity-related securities. For instance, if your monthly income post tax-deductions is Rs 5,00,000, then you must invest at least Rs 1,50,000 in equity mutual funds via SIP each month.

If you can afford to invest a higher proportion of your funds towards equities, then do not limit yourself to 30% cap.

Whether you wish to invest in SIP to cater to certain financial goals or to aid wealth creation, you must put some thought about how you can set aside certain sum of money each month to serve your needs. Happy investing!

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