Data from the Association of Mutual Funds in India (AMFI) revealed that the industry collected Rs.7,727 crore via SIPs in September 2018, registering a yearon- year growth of 40%. It also revealed that the industry has around 2.44 crore SIP accounts, used by investors to invest in various mutual fund schemes. This underlines the growing popularity of mutual funds and the inclination towards using SIPs as a mode of saving.
SIPs are often recommended for achieving long-term financial goals. However, to reach the goal, financial planners need to work backwards and arrive at a plan of action. This includes calculating the monthly amount that the investor needs to put aside.
Here is how one needs to go about this:
No Definite Rule
While it is easy to arrive at the SIP amount using a SIP calculator, each individual is different in terms of income, liabilities, and financial goals. So, choosing the right SIP amount is more than a mathematical equation. To suggest the ideal amount, a financial advisor must:
- Analyse Your Client’s Goals
List down your client’s major goals in the order of their importance for them. The essential goals for most include building an emergency corpus, higher education for their children, their marriage, and retirement. Buying a home and car too feature among important milestones.
Apart from knowing these goals, gain a holistic view of your client’s monthly cash inflows and the expenses incurred. The SIP amount can be arrived at after noting down the expenses incurred and the monthly savings available. Goal-based investing is one of the fundamental mantras of wealth-creation. It ensures that the available savings are invested for the right goal at the right time.
- Allocating the Savings
The investment required for each life goal is different. For example, building an emergency corpus might require a few lakhs (equivalent to expenses worth 5-6 months) and can be built by investing in liquid or short-term bond funds. On the other hand, a goal like saving for a child’s higher education might warrant a longer commitment. For instance, a 4-year-engineering degree costing Rs. 10 lakh today, would cost close to Rs. 18 lakh, ten years down the line (assuming inflation of 6% p.a.).
So If you had invested Rs. 6,152 per month at a rate of 16% XIRR in S&P BSE Sensex, you would have reached your goal of Rs. 18,00,000 in ten years.^ (An SIP of Rs. 6,152 made on 5th of every month in S&P BSE Sensex is considered) Similarly, if the current monthly expense of your client is Rs. 25,000, and he/ she has 20 years to retire, even a modest inflation of 5% p.a. would need him/ her to have a lump sum of Rs. 1.31 crores to address the post-retirement expenses. So If your client had invested Rs. 7,588 per month at a rate of 16% XIRR in S&P BSE Sensex, he would have reached his goal of Rs. 1.3 crores in twenty years.^ (An SIP of Rs. 7,588 made on 5th of every month in S&P BSE Sensex is considered)
- Know the Investment Horizon
An essential factor in gauging the right SIP amount is the investment horizon. Starting early has its benefits and advantages like:
- It warrants a lesser amount to build the desired corpus
- It brings in the power of compounding
- For example, you would have reached a goal of Rs. 50 lakhs if you had just invested Rs. 2,896 in S&P BSE Sensex 15 years back. (at a rate of 16%). ^
Knowledge of these essential aspects can aid you in arriving at the right SIP amount for your client and in helping them with long-term wealth creation.
IDFC Mutual Fund offers tools and calculators to help you determine the right SIP amount for your client.
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^No equity fund offers assured or fixed returns. Past performance may or may not be sustained in future.