Starting a systematic investment plan (SIP) in an equity mutual fund scheme is now a matter of just a few minutes. You can log into an online investment platform, enter your details, link your bank account and start transacting.
The question is how much should you have in one SIP and how much in aggregate SIPs? Is this an accurate calculation or an ad hoc amount? The answer really depends on what you want to achieve with the SIP. Your monthly SIP amount will be a result of this.
SIP for defined goals
When your goals are defined, it is easier to know how much to invest through SIPs. Ideally, SIPs are set up for long term goals where you need to accumulate savings. It doesn’t mean you can’t start a SIP for something six months away, however, investing through SIPs for goals more than 2-3 years away is more efficient as it gives you opportunities to invest across market cycles and take manage volatility.
Begin by defining the goal or goals. Once that is done put a time period to it; say goal A needs to be achieved in five years and goal B in 8 years and so on. Then assign values; goal A needs Rs 15 lakh after 5 years and goal B needs Rs 20 lakh after 8 years. Now assume a reasonable annualized rate of return, say 12% a year.
For goal A, you need to make a monthly SIP of Rs 6,000 and for goal B you need a monthly SIP of Rs 5,000. If these are the only two goals you want to work towards, then your SIP amount is Rs 11,000 per month.
Now check what this is as a proportion of your monthly salary; ideally, your savings should be at least 30% of your monthly salary. If it’s anything lower, top it up with the difference and that amount can be your long-term wealth creation kitty. If it’s turning out to be higher, then reduce your expenses and start saving more.
SIP for wealth creation
If all your long-term goals are provided for and you don’t have a defined amount to work towards, then determining this can become a bit vague. Should you just estimate a surplus each month and invest that through SIPs? Ideally, when you are investing only for wealth creation, the assumption is that you are doing this to support a certain lifestyle post-retirement.
In doing that, some amount of precision is always useful. Ideally, save and invest at least 30% of your monthly income. If you don’t have any defined goals or emergency fund needs, then you can invest this entire amount in equity. Or else, mark out the amount required to top up your emergency fund and then invest the rest through SIPs in equity mutual funds.
For example, if your monthly post-tax income is Rs 300,000, invest at least Rs 90,000 in equity SIPs every month.
For wealth creation to happen over a period of time, you have to commit higher amounts early on, don’t restrict yourself to the 30% mark if you can afford it.
Whether it’s for wealth creation or defined goals, put some thought into how much you can put aside monthly so that you can maximise what your investment can achieve.