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

If money controls you, it is subsequently controling 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?

Best is to achieve financial freedom so that you can fulfill 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 an SIP?

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

Also, it is not necessary that if I do an 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 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 fulfill your objective.

Example 1

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

You plan to invest for 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 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 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 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

An 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 as step-up SIP.

From 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 an 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 an 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 investment is segregated and is meant for its objective.

Simple mantra being, “If you plan and invest, you don’t have to worry about the safety limit”

Happy Investing!

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