How to Choose the Right SIP Amount to Fulfill Your Goals

People invest in equity mutual funds for many reasons – to build wealth for retirement, save for a big purchase, and so on. However, not every person can manage to make a lump sum investment. This is where a Systematic Investment Plan (SIP) comes in.

A SIP enables you to deposit a particular amount in mutual funds at fixed intervals, from daily and weekly to monthly and quarterly. The easiest way to go about this is to automate your salary or savings account so that you avoid missing out on payments and continue growing your corpus.

However, if you are trying to fulfill a financial goal, you can’t keep investing a random amount. You need a systematic plan. This article will help you formulate this plan by detailing each factor that should decide your SIP amount.

1. Define your goal

Typically, mutual funds are beneficial for long-term investments as they take advantage of market cycles while having enough time to recover from volatility. Therefore, the first question you need to answer is: what are you saving for? This will immediately bring you to the second question: when does your goal need to be achieved?

2. Calculate your expenses

Once you’ve decided on a goal, it’s time to estimate the amount you need to save. If the SIP is going towards a retirement fund, this amount will depend on the age at which you start investing, along with factors like lifestyle, your family’s needs, inflation, etc. Start by making a list of current monthly expenses, and multiply it by 25-30 years of life after retirement. Read ahead to add the final factor to this calculation.

3. Factor in the inflation rate

Unless the purpose of your SIP is purely to serve as a savings instrument, you need to think about how inflation will affect your financial objectives.

Let’s say you are 30 years old, and your monthly expenses are Rs. 30,000 currently. From the ages of 60 to 85, you will need at least Rs. 90 lakhs to maintain the same lifestyle.

But wait, markets undergo annualized inflation, and without accounting for it, your SIP is likely to fall short of meeting your investment goal. The average inflation in India is considered to be 5-6%. By that calculation, on retiring after 30 years, you will need a minimum corpus of Rs. 3 crores and 90 lakhs.

4. Include the rate of return

Your rate of return depends on the mutual funds you choose. While calculating your SIP amount, it’s better to consider the historical average of around 12 to 15 percent.

Let’s say your goal amount is Rs. 3 crores and 90 lakhs for an investment duration of 30 years. At 15 percent expected returns, your total investment will be Rs. 20.28 lakhs, amounting to a monthly SIP of Rs. 5,633.

Conclusion

SIP calculation can get tiresome, given there are so many numbers and factors to keep track of. To make this task easy, you can access a host of websites or even verified online investment apps, such as Tata Capital Moneyfy App, where all you need is to enter details such as your financial goal, the investment horizon (time to fulfill the goal), the average interest rates your investment offers, the calculator will automatically take into account the inflation rate or may ask for it, and will compute a precise figure to invest using a SIP.