DT Personal Finance: How to plan monthly SIPs to achieve your life goals

NEW DELHI: Whoever invests in mutual funds already knows what SIPs are. And the significance of SIP for small investors in achieving their financial goals cannot be overstated. Most people start their SIP journeys with small amounts of Rs 5,000-Rs 10,000 per month. But we all know that these amounts will never be enough to fund all our financial goals.

So, how do you decide on the correct SIP amount that you should invest every month?

Most people randomly pick an amount that works for them. But there is a right way to arrive at the right SIP figure.

Let’s take an example and it will be easily clear.

Imagine you are a 37-year-old individual earning a monthly in-hand salary of Rs 1 lakh. Your basic monthly expenses are Rs 50,000, and that leaves you with a monthly surplus of Rs 50,000. Now you want to start investing in mutual funds but are not sure how much.

Let’s look at your goals first. Suppose you have the following financial goals in your life:

House Downpayment: Rs 12 lakh in 4 years

Son’s education: Rs 35 lakh in 12 years

Own Retirement: Rs 3 crore in 23 years

Now you need to do some mathematical calculations (ones which investment advisors generally do) to find out how much you need to invest every month to reach the above goals.

Doing some number crunching (and assuming there are no existing savings, which practically may not be true), here is what you need to do:

House Downpayment: About Rs 21,000 monthly in 100% debt allocation for 4 years.

Son’s education: About Rs 13,000 monthly in 60:40 equity:debt allocation for 12 years.

Own Retirement: About Rs 32,000 monthly in 60:40 equity:debt allocation for 23 years.

This totals to about Rs 66,000 per month for pursuing all the goals simultaneously. But if you remember, at the start we saw that your available monthly surplus if only Rs 50,000 per month. And that is less than what is required as per goal calculations.

You can only invest what is possible for you and that is Rs 50,000. So we do that by prioritising some short-medium term goals and investing lesser for longer-term goals.

One possible approach is given below:

House Downpayment: Rs 20,000 monthly

Son’s education: Rs 12,500 monthly

Own Retirement: Rs 17,500 monthly

Now while you are funding the first two goals as per requirement (almost), the goal of retirement is not getting fully funded. We need Rs 32,000 but we are only doing Rs 17,500 monthly.

This is not perfect but still better than doing nothing. Isn’t it? And remember that once your short term goals are over, you will have freed up some surplus. In addition, your income will also increase. These two factors will allow you to invest a lot more in just a few years’ time which will compensate for the lesser amount that you are investing initially.

As your income rises, you can gradually increase or step up your monthly SIP amounts. That was about deciding the right SIP amount and what to do if you can’t invest that much. But before we end, let me remind you that you don’t need to just focus on monthly SIPs. After a few years of accumulation, your mutual fund portfolio will be significantly large and require you to periodically review and rebalance it. This is something that is very critical but most investors don’t do it.

In conclusion, choosing the right monthly SIP amount is crucial if you wish to achieve your financial goals. Simply investing a random amount every month won’t take you anywhere.

Most people randomly pick an amount that works for them. But there is a right way to arrive at the right SIP figure