Mutual Fund is a popular form of making investments in the market. It is a financial investment vehicle that pools in money from investors to further invest it in stocks, bonds, money market instruments and other assets. The investment decisions are made by the professional fund managers and analysts who work on the research to make sure that the fund reaches its goals, mentioned in the scheme information document. Mutual fund schemes can be classified in various kinds - such as equity, debt, hybrid and solution oriented schemes, etc. – which gives retail investors the chance to choose from a variety of offerings, based on their risk capacity and financial goals.
Long term investing, ideally for 5 years or more, is preferred in case of equity mutual fund. And in case of debt mutual fund, short term investing for a few day’s months to long term investing of few years can be done. Investors can choose the boat they wish to sail in, given the financial goals they are looking to reach. Now, diving further into the concept of mutual fund, we need to understand the most popular way of investing in it – SIP Investment Plan.
You must have heard that SIP mutual fund is for the long term which helps to reach financial goals. While there is no denying the above statement, the fact remains that simply investing in mutual fund for long term via SIP investment plan may not help you achieve financial goals.
Then, what will? It is the ‘right SIP amount’
What is the right SIP amount?
To decide the right SIP amount, you need to know the following –
The goal amount at current cost
After how many years the goal need to be achieved
Average inflation rate
Revised goal amount after accounting inflation
The expected return on SIP investment
Know the right SIP amount to achieve the inflation adjusted goal amount
Let us understand this through an example
Vidya wants to invest in equity mutual funds through SIPs for building her retirement home after 15 years from today. Suppose, the current cost of her retirement home is Rs 1 Crore. We now know the current cost of the goal amount and the number of years remaining to reach her goal.
Now, we will apply average annual inflation of say, 5% over 15 years. Therefore, the inflation adjusted goal amount would be Rs 2.08 Crores! Therefore, Vidya needs to start SIP investment plan for achieving the goal amount of Rs 2.08 Crores, and not Rs 1 Crore.
So what would be right SIP amount to reach the above goal? Here, we need to apply the expected rate of return from her SIP investments. As she is investing in equity mutual funds, we can assume 12% annual return rate over the 15 years investment tenure. Vidya needs to save Rs 41,600 monthly in equity mutual fund, to reach the goal of Rs 1.48 Crores.
Therefore, the right monthly SIP amount to reach the above goal of Rs 2.08 Crores is monthly Rs 41,600. Her SIP amount would have been only Rs 20,000 if she had not accounted the inflation.
Hence, it is imperative to do an in depth analysis on SIP Mutual Fund before making a decision to invest in it.
SIP Investment Plan and its various facets was the flavour of this article. We have tried to discuss something crucial here that most investors don’t give much heed to - the right SIP amount. When one is aware of this amount, goal planning becomes easier and sustainable.