It isn’t perfect. But an SIP is a small investor’s best bet at achieving her financial goals. And I am not exaggerating this aspect.
Most people start with a small amount – Rs 5000 or Rs 10,000 a month – to gain experience of regular investing. But as you also know, just investing Rs 5000-10,000 per month won’t help you reach your financial goals.
So, how should you decide your correct monthly SIP (systematic investment plan) amount?
Investing your surplus
Let’s take a small example to understand this better.
Suppose you are a 35-year-old who earns Rs 1.25 lakh per month in-hand salary. You and your employer together also contribute a total of Rs 10,000 per month towards EPF. The regular monthly expenses are Rs 75,000 per month and, hence, you can invest Rs 50,000 per month from the surplus.
From this surplus, you had just begun investing Rs 10,000 per month in SIP and were parking the remaining money in random financial instruments.
There are few goals that you are targeting:
-Down-payment for house purchase (Rs 15 lakh after 5 years),
-Daughter’s higher education (Rs 50 lakh after 14 years), and
-Retirement (Rs 5 crore after 25 years)
Doing some financial planning calculations, you find out that you need to invest:
-Rs 19000-21,000 per month in 75-100 percent debt for 5 years to accumulate your downpayment of Rs 15 lakh for house purchase.
-Rs 14000-15,000 per month in 60:40 Equity:Debt for 14 years to accumulate Rs 50 lakh for daughter’s higher education.
-Rs 42000-43,000 per month in 60:40 Equity:Debt for 25 years to accumulate Rs 5 crore for your retirement.
Note: Assuming for simplicity, that there are no existing investments.
So, in total, you need to invest Rs 75000-79,000 per month to achieve your goals within your chosen timelines (and target budgets).
But there is a small problem now.
The surplus available is just Rs 50,000 a month. And you need Rs 75,000 at least.
You, of course, cannot invest more than what your surplus is. Right? But that is still fine. What can be done is that you could start with what you have, i.e., Rs 50,000 as follows:
-Rs 20,000 per month for house down-payment
-Rs 15,000 per month for daughter’s higher education
-The remaining Rs 15,000 per month for your retirement. You are already investing Rs 10,000 via EPF. So a total of Rs 25,000 is now going towards retirement.
As you can see, you are adequately funding the goals of house purchase and daughter’s higher education. But you are still underfunding retirement as it requires an investment of Rs 42000-43,000 per month and you are only contributing Rs 25,000 per month. But don’t worry.
Remember, your house purchase goal is only for five years. So, after the completion of five years, the amount going towards that goal (Rs 20,000) will be freed up. But wait. Let’s not forget that your home loan EMI will also start. So we can’t use that surplus.
Your daughter’s education goal will also be over in 14 years. You will then have another 11 years left for retirement then. And the money going towards your daughter’s savings will then be free to be used for retirement. So that will compensate the retirement funding gap a bit.
But it may still not be enough. What is the solution then?
Your income will not stay stagnant at Rs 1.25 lakh per year. Right? So as your income increases, you should gradually try and increase your monthly SIP amount as well.
Stepping up SIPs to increase the investment amount can help you increase the probability of goal achievement.
And there is one more important thing. Do not miss the forest for the trees. SIP is important. But after few years of accumulation, your MF portfolio size will be much larger than the monthly SIP amount. So you also need to take care of this aspect by rebalancing the overall portfolio periodically.And as you get closer to your goal, it’s all the more important that you gradually de-risk your portfolio to protect it from last-minute market crashes that can undo years of hard (investment) work and deplete the corpus drastically.