How to Decide the Right SIP Amount to Reach Your Financial Goals

Dec 27, 2022

Listen to How to Decide the Right SIP Amount to Reach Your Financial Goals

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Savings and investments are essential for an individual to lead a financially secure future. One of the best tools to start your investment journey is a mutual fund; you can either make a lumpsum investment in mutual funds or opt for a Systematic Investment Plan (SIP) and invest a small amount of money periodically.

Systematic Investment Plans (SIPs) have struck a chord with retail investors. As per data from the Association of Mutual Funds in India (AMFI), there are about 6.05 crore SIP accounts in the country through which investors invest in their chosen mutual funds. SIPs have become more popular as a result of the benefits they provide to investors. SIPs are the best choice for novice or first-time investors since they let you earn significant returns at a low investment risk.

First-time investors often hesitate to park a large sum of money in mutual funds, but SIPs don't require a big amount for investment. You can start investing in mutual funds through SIPs with as low as Rs 500. You can invest a fixed amount every week, month, quarter, or half-yearly for a definite tenure depending on your income and financial goals.

What are the benefits of investing in mutual funds via SIP?

Investing through an SIP plan imparts financial discipline to your life. It enables you to consistently invest without being concerned about market turbulence, economic instability, etc. When you make an investment through a SIP, money is automatically transferred from your bank account on a regular basis and invested in a mutual fund plan of your choice based on your suitability. Equities have a larger potential than other investments to provide a higher real rate of return over the long run. In order to accomplish their long-term goals, investors may think about making SIP investments in equities mutual funds.

SIP is a great tool for averaging investment costs and maximising returns. When you regularly invest through an SIP for a long period, irrespective of the market ups and downs, you buy more units when the market is down and fewer units when the market is up. SIP investment offers the benefit of the power of compounding; it helps you build a large corpus to achieve your financial goals.

[Read: 5 Key Benefits of Investing in Mutual Funds via SIP]

How to analyse the amount to be invested in an SIP?

It now takes only a few minutes to begin a Systematic Investment Plan (SIP) in an equity mutual fund scheme. You can log in to an investment platform, fill up your information, link your bank account, and then begin making transactions.

However, while SIPs imbibe a disciplined savings habit and help in wealth creation in a disciplined and sustained manner, investors often fail to zero in on the right SIP amount. In other words, they fail to gauge the amount they should invest via SIPs. You would have heard this countless times that SIP investment provides significant returns in the long run. But, just because a long-term SIP in equity fund works does not mean you will achieve your financial goals. It will work effectively towards your financial goals only if you focus on investing the right SIP amount for the envisioned goal.

What is the right SIP amount you should invest in a mutual fund scheme? Well, the answer really depends on what you want to achieve with the SIP investment that you are planning.

An individual needs to define his/her financial goals and put them in the order of priority. This would ideally be the first step, you must classify your goals in three broad buckets - long, medium, and short-term to begin with your investments towards them. Long-term goals are the ones that are a good 15 to 20 years away. Objectives that you want to achieve in 3 to 5 years can be classified as medium-term, while short-term are the ones that you seek to achieve in the next 6 months to 1 year.

Every individual has various financial goals with different priorities, such as higher education for children, marriage, and retirement are typically long-term goals. On the other hand, buying a house or car falls in the category of medium-term goals, and building an emergency corpus or saving for a vacation are under the ambit of short-term goals. You can figure out the SIP amount after noting and drawing a clear picture of these goals.

Are you planning to invest through SIP route in a mutual fund scheme? If you are also confused about what your SIP amount should be, this article will help you calculate the right amount.

How to Decide the Right SIP Amount to Reach Your Financial Goals
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Let us understand with an example - how to choose the right SIP amount to reach your financial goals

Goal-based planning is the right way to approach investments. When your goals are defined, it is easier to know how much to invest through SIPs.

Example 1 - Mr A is 35 years old and has a child who is 3 years old; he is looking to make investments with a long-term goal to build a corpus for his child's higher education and to save for the child's engineering expenses which he will incur after 15 years. The current cost for the engineering course is Rs 10 to 12 lacs.

Example 2 - Mr B is 30 years old and seeking to buy a house after 10 years for his family, and currently, the cost of the house is 50 lacs.

So now we have information on the current cost of the goal amount and the number of years remaining to reach the goals. Assuming that due to inflation, the cost of education would increase and prices of houses may rise, we consider the inflation rate at 7.5% per annum.

Mr A (Child's higher education) Mr B (Buying a house)
Current cost Rs 10 lacs Rs 50 lacs
Current age 35 years 30 years
Years from now 15 years 15 years
Inflation rate 7.5% 7.5%
Amt required to achieve the goal Rs 21.59 lacs (Future value calculation in excel) Rs 1.48 crores (Future value calculation in excel)
(This is only for illustrative purpose actual figures may vary)

Here we need to apply the expected rate of return that you will receive from SIP investments. Considering an investment in equity mutual funds, we can assume 10% annual rate of return. Unfortunately, many investors skip this step; most of them find the calculation of SIP amount too tricky or are unable to do it themselves and end up investing a random amount in their SIP.

You can calculate the value of your monthly SIP with the help of an SIP Calculator by just entering a few details, such as the monthly SIP amount, the SIP tenure and the compounded rate of return you expect from the mutual fund in which you are starting your investment.


As per the illustration mentioned above, if Mr A has to arrive at the future value of his goal, which is Rs. 21.59 lacs, he needs to start investing with an SIP of Rs 5,500/- per month to reach his goal in 15 years. Similarly, Mr B, who is willing to buy a house in 15 years, needs to invest Rs 35,500 per month in an equity mutual fund scheme to reach the goal of Rs 1.48 Crores. Thus, while calculating your SIP amount to reach your financial goals, you need to consider factors like inflation and the rate of return on your investment over the investment horizon.

However, the only challenge for an individual would be managing the huge SIP amount like Rs 35,500/-. If an individual who is 30 years of age and is spending Rs. 25,000/- towards monthly expenses might not have so much surplus on a monthly basis. This situation could lead an individual to believe put off investments in SIP now and wait until they start have a huge corpus to invest. Larger sums of money in the form of SIP might just scare people away.

You see, an advantage salaried people have is that the income level doesn't remain the same throughout; it increases gradually almost every year through increments and bonuses etc. Keeping this in mind, even if an investor starts a smaller sum in an SIP and constantly increases by 10% every year, they might just reach the financial goals without burdening the current finances.


To conclude...

Now that you have understood the right SIP amount to reach your financial goals, selecting the best suitable mutual fund schemes aligned to your goals is equally important. Given that, many individuals find it difficult to choose suitable mutual fund schemes to invest towards their financial goals due to a lack of market knowledge and struggle to deal with the high market volatility driven by dynamic market conditions.

PersonalFN's SMART Fund Explorer can help you plan your mutual fund investments smartly to achieve your financial goals. You can simply state your S.M.A.R.T financial goals, such as the type of goal (buying a house, car, retirement, etc.), determine a suitable time frame for achieving them, and insert the amount of money that you are willing to invest towards your goal.

PersonalFN's SMART Fund Explorer considering the details entered, provides you with a decent expected rate of return on the investments and the value of an investment at the target date. It will offer you with two mutual funds investment options (A & B) that you can choose based on your risk profile. Further, you can also get instant access to the list of the best suitable mutual fund schemes as per your selected plan by enrolling to PersonalFN's SMART Fund Explorer.

This is an opportunity to begin your investment in mutual funds with a smartly selected list of recommended mutual funds by our research team. So what are you waiting for? Click on the key to accomplishing your financial goals with PersonalFN's SMART Fund Explorer.


Warm Regards,
Mitali Dhoke
Research Analyst

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