There are two routes to invest in a mutual fund: lumpsum and SIP. Lumpsum investment involves making a one-time investment, whether large or small, in a mutual fund scheme. On the other hand, in a systematic investment plan or SIP, you invest a small, fixed amount at regular intervals. They can be done at a pre-determined time interval such as weekly, monthly, quarterly, half yearly or yearly. SIPs are even light on the pocket as you can start with an amount as low as Rs. 500. SIPs aid in accumulating wealth over a long period of time because when you invest a fixed amount at regular intervals you are forced to save up that money instead of spending it. This inculcates financial discipline and a habit of saving which lasts a lifetime.
The dual benefit of SIPs
Creating wealth overnight is impossible, but when you invest small, fixed amounts periodically over a long period of time, wealth creation becomes achievable because two factors working their magic – power of compounding and rupee cost averaging.
Compounding effect in SIP helps you earn potential returns on both the principal amount and on gains earned on previous instalments. Whereas the concept of rupee cost averaging turns volatility into opportunity. Markets go through various cycles pushing the NAV of a mutual fund scheme up and down. When the NAV declines, your fixed SIP amount buys more units and when the NAV goes up your SIP buys fewer units. Over time you end up averaging your cost of buying by accumulating higher number of units at a much lower cost during the investment period.
How do I decide the ideal amount for SIP investment
Before we talk about the ideal SIP amount let us look at some factors to be considered before deciding on it. The ideal SIP amount should depend on your financial goals and investment horizon. Financial goals are personal objectives you strive to achieve as you move forward in life, for example buying a car. Investment horizon is the period over which you want to remain invested in a mutual fund scheme and can be classified as short-term, medium-term, or long-term.
You can have multiple SIPs for multiple financial goals, but we suggest not to over do it for the ease of tracking performance and asset allocation. Suppose you want to start a 3-yr SIP for a medium-term goal like buying a car. The corpus you plan to have at the end of three years will decide the amount of SIP instalments. At the end of three years, you can either buy the car from that corpus or use it as a down payment along with a car loan. This example shows us how the ideal SIP amount will be determined by the number of years you have and the corpus you plan to accumulate.
Now to answer the big question, ‘WHAT is the ideal SIP amount?’
Other than the factors mentioned above, the ideal SIP amount will also depend on your income level, expenses, and your propensity to save.
When it comes to overall investment amount, as a rule of thumb, we suggest you invest at least 20% of your in-hand income. You can always dedicate an amount higher than 20% for your investments. The higher your investments, the better it will be for your wealth creation plans in the long-term.
However, when it comes to an SIP, there are two things that can be done. One way to decide would be to calculate what 20% of your income comes to and then assume about 5-6 SIPs in various mutual fund schemes. About 6 schemes in a portfolio is considered a good number.
The other way is that you can decide your SIP amount based on your financial goal and the investment horizon you have set for it. For instance, suppose your parents are due for surgery in a year’s time and you plan to save via monthly SIPs, then you may want to choose an SIP amount that is equal to the cost of the surgery or at least one that covers the cost partially. You could plan similarly for all your financial goals.
As you may have already guessed, it is impossible to decide on an ideal SIP amount, just as it is difficult to choose the best book, sportsmen, movie, song or even holiday destination in the world. What works best for you would be the ideal SIP amount for you. So, start on your investment journey today and learn what works best for you. In case you still need help, then reach out to a financial advisor or expert at the earliest.