Is There an Ideal SIP Amount to Invest in Mutual Funds and How Long Should You Invest in it?

25 July 2022
9 min read
Is There an Ideal SIP Amount to Invest in Mutual Funds and How Long Should You Invest in it?

In life, either money controls you, or you control money.

If money controls you, it is subsequently controlling your life, freedom, dreams, and almost everything.

But is that what you want?

If your answer is “No”,

Then what should be done in this case?

The best is to achieve financial freedom so that you can fulfil your long-term goals. Whenever you talk of purpose and financial independence, you hear of Systematic Investment Plans (SIP) in mutual funds.

SIP is considered to be the safest and most reliable route for investing in equities to create wealth over the long-term period.

In our previous blogs, we have talked about SIP, so we will not cover it in detail here, but, we will touch upon the concept. SIP is a regular investment plan in which you invest a fixed sum of money regularly (mostly monthly or quarterly) in a mutual fund scheme.

This approach is similar to the recurring deposit offered by banks.

How Much Should You Invest in a SIP?

Let me tell you this, there is nothing called a right or wrong amount.

Also, it is not necessary that if I do a SIP of Rs 5000, my friend or even my spouse/ siblings must invest the same amount.

Remember, in mutual funds – one size doesn’t fit all.

So you need to assess the amount first and then see if that amount, small or large is apt for your risk appetite and investment duration.

An individual needs to define his/her financial goals and put them in the order of priority. This would help them plan accordingly.

For example, if you have the following goals, you need to prioritize your goals and thus decide on the monthly investment amount so that you can achieve your objective.

  • Emergency corpus
  • Wealth creation
  • Retirement planning
  • Buying a car & house
  • Children’s higher education

To begin with, the corpus required for emergency purposes should be the first saving that must be done even before you start investing.

Ideally, it should be the total amount needed for running monthly expenses for 4­6 to months.

Once the emergency corpus is set aside, further investments should be made to meet other financial goals. The SIP investments should ideally be linked to specific financial goals.

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How Can You Determine Your Financial Goal and Compute Monthly Investment?

The first step is to find the amount you need to fulfil your objective.

Example 1

Assume you are 30 years old and you have a child who is two years old.

You plan to invest in your child’s education, and you wish to save for her engineering expense which you will incur after 15 years.

Now, the current cost for the engineering course is Rs 10,00,000 in Mumbai. Assuming that the cost of education would increase by 5% per annum, you would need Rs 21.07 lakhs to meet the goal of a child’s higher education.

To attain Rs. 21.07 lakhs in 15 years, one can look to invest in small-cap funds because the time horizon is long-term (15 years).

Thus, assuming returns of 18% at starting a SIP of Rs 2295 per month. Given the amount is less, you can choose to invest in only one fund such as HDFC Small-cap Fund.

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What Happens if Your Monthly SIP Contribution Is High?

In case your monthly contribution for a goal is Rs. 6000, you may choose to divide it into three funds with Rs. 2000 each or even two funds with Rs 3000 each.

Ideally, the number of funds per objective shouldn’t increase to more than five.

Combining Financial Goals

We believe an investor should not combine all his financial goals

Goal-based planning is the right way to approach investing. If you follow the above strategy, you do not worry even if you have cumulative SIP upwards, because, each goal is different and you can’t compare one with the other.

This is because each basket of investment will be meant for an objective and the right planning and fund selection shall help you achieve the same.

Also, you should put to use the power of human capital while planning for your goals. Let us see what is human capital and how it influences your goal planning

The Power of Human Capital

Any individual (salaried or self-employed) strives to perform better as the days pass.

Thus, his/her income level starts to rise every year. Also, with inflation and greater responsibility, his/her expenditure per month tends to increase.

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But at a broader level, his/her disposable income grows despite the growing cost. An investor should take into consideration this while planning.

Example 2

Assuming the individual plans to increase his/her SIP amount by 10% every year (in line with his salary hike), he/she needs to start with an investment of Rs. 1465 monthly only.

This concept is termed step-up SIP.

From the second year onwards, he needs to increase his SIP amount by 10% after that.

Thus, if you see the amount in step-up SIP is lower than regular.

When Does SIP Work?

1. Bull or Rising Market

SIP yields a positive result in the rising market. While every new purchase gets costly, the portfolio is valued at an even higher price, finally.

2. Volatile, but Uptrend Market

SIPs perform well in an unpredictable bull market. This is due to rupee cost averaging.

3. The Market Corrects but Eventually Moves up

This sort of market provides an excellent opportunity to invest low and sell high.

When is the right time to invest in lump sum and SIP?

When Does SIP Not Work?

1. Bear or Falling Market

SIPs generally don’t work in the bear market, and your cost of purchase would remain high, although your value will continue to fall with every decline.

Hence, most financial advisers will recommend you to invest in a SIP for the long haul, so that you can beat market volatility and your investments will have adequate time to bloom.

2. Flat / Sideways Market

SIPs don’t work well in a rangebound market where rupee cost averaging doesn’t get the best value.

What Did We Learn?

To sum it up, there is no right amount for a SIP.

The first step remains to determine your objective, your risk appetite, expected returns, etc. and you can start investing.

Remember, having separate investments for each goal is the best way, This method also ensures each of your investments is segregated and is meant for its objective.

The simple mantra is, “If you plan and invest, you don’t have to worry about the safety limit”

How Long Should You Run Your SIP?

Ever since demonetization was announced, the search record for SIP has been on an upward trend.

In our blog, we have discussed the basics of SIP and other related concepts around SIP. We believe it is time we move to something that is to do with the strategy of SIP.

Have you ever thought about how long you should run your SIP?

This is one of the questions that trouble nearly all investors once they buy into the concept of investing through the SIP mode.

Another question on similar lines that investors tend to ask is:

Over what period should you spread your SIP, if you have a lump sum amount to invest?

The second question is not very common as in India middle and low-income people tend to subscribe to a SIP which is generally carved out from the monthly income.

Where to Invest?

Investing in equity is considered to be the best way to get returns across any asset class.

Be it real estate, commodity, art, weapon or any other form of asset; equity has outperformed every asset class over the past five decades.

What’s the Downside?

Equity is considered risky for a short period.

It is dangerous if you invest a large sum of money for a short period because if the market tumbles, you can lose as much as 20-30% of the value.

For example, investors in the Indian market were overwhelmed with the returns of the small-cap segment in 2017, and they ended up investing sizeable amounts in Jan 2018, assuming the market would climb further.

But alas, the opposite happened and investors lost as much as 30%.

So, if you happened to catch a period like this, you will see wealth erosion, before wealth creation.

What is the Solution?

The antidote to this is Systematic Investment Plan. You should spend your investment evenly over a ‘certain period.’

This process would help minimize the cost of acquisition and improve the chance of making a profit. Investing at every price point eventually helps you average out your cost of acquisition.

So, even if the market corrected significantly, your SIP in the down market will help you by constraining losses you would have made had you invested in one go.

However, the pressing question here is what a certain period is?

Is it one year? Or three years? Or seven years?

Well, you will find arguments in favour and against for each of the three periods.

If you invest in aN SIP for four years or more, it is likely that you will get a positive result (applicable for equity funds which bear a high degree of risk).


Let us take an example, assume you invested after demonetization when the market corrected nearly 20%. You invested in a small-cap fund thinking you will create wealth.

Your portfolio would have seen enormous wealth created by the end of December 2017.

Now, compare your returns as of December 2018 or even the current date, your profit is nearly negligible concerning your investment.

The market level as of November 7, 2016, and the current date are very similar. Thus, you haven’t made any money in two years.

But now assume you invested in 2014 depending on the macroeconomic condition of the economy and change in government in the centre, despite the period of underperformance, your portfolio would have been positive in four years.

So, it is interesting to see that the chances of gains and losses are high over the short period, but over the long period, the good times and the bad times get averaged out.

This results in a convergence of the maximum and minimum points. Thus, It’s also interesting that the risk of loss and the chance of an outside gain is both higher over the short period.

Over more extended periods, the good times and the bad get averaged out minima, and the maxima converge.

The small-cap space corrected nearly 30% in the past year. Despite the correction, if you look at the three years and five years returns, you will see signs of stability.

So, you should invest this money in liquid funds, as a lump sum and do a systematic transfer from the liquid fund to the desired fund (selected based on your goal, risk appetite, and investment horizon). This is called a Systematic Transfer Plan.

This process shall help you not lose out on the value of money by remaining invested in liquid funds. Also, this prevents you from the risk of lump sum investment.

But What Should the Period be?

Should it be one year? Five years? Or 15 years?

Depends entirely on the fund and your goal.

Now, if you want to venture by way of SIP, it is advisable that you invest for a longer period of time. It also depends on your ideal investment duration.

To conclude, we can say that the trade-off is clear. With the short-time horizon, you may see a higher potential gain, but the risk of losing is also very high.

In the case of SIPs, it should last for more than three years minimum if you are looking for zero loss.

Happy SIP Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww


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