Investing in Systematic Investment Plan could be for various goals such as retirement, higher education, marriage of children and so on. SIP is one of the best instruments to invest in mutual fund with small amounts in order to achieve long term financial goals. However, if you are investing for the first time, then identifying the right amount of money that you need to invest every month in order to achieve your goal might be something that you need to work upon. There are few steps which will help an Individual to calculate the amount which he needs to invest on monthly basis.
Estimate how much you need to fulfill your goal – Do not pick random figures without calculating the amount. For instance, if you have calculated that you need Rs 1 crore as retirement corpus then evaluate, how did you reach that figure. Is it just a wild guess or you have taken factors such as inflation rate and your yearly expenses into account. Making random guesses could be dangerous and you could end of shaving too less or too much at retirement.
Therefore, every factor such as expenses that you are having now and that you will have in future should be calculated and then the final amount should be reached. Also fix the time by which you will need this fund. It will help you in calculating the monthly installment to achieve the goal.
Adjust the Inflation amount – After you have calculated the amount that you need to achieve goal, look if they are inflation adjusted. Price of the commodities are not going to be the same and any product that you are using today will be at higher price in the future. To put it simple, you cannot afford the same life style 10 years from now on spending the same amount that you are doing today. Therefore, it is very important that the amount that you have calculated should be inflation adjusted to achieve realistic goals. Adjust the amount after taking a realistic inflation rate somewhere between 6% and 8%. Lets consider an instance where you want around Rs 10 lakhs for your daughter’s marriage. We are assuming the inflation rate of 8% and time frame is 10 years. Using the excel function fx and select Future Value (FV) as the function.
Rate : Put the Inflation rate in the rate column. Here we are taking it as 8%
NPER- Years which you have decided to use for calculation. Here we have given 10 years.
PMT – Not taking periodic payment here and leaving the column blank.
PV – Current value of financial goal is 10 lakh
Type- Leave it blank
The excel will calculate that by the end of 10 years you will need Rs 21,58,925 if you need 10 lakhs today.
Expected Return – Make a realistic return expectation and better be conservative when you are expecting future rate of return. Don’t live under the false assumption that putting your money in the stock will give you double returns. Taking cue from the historical rate is very important while calculating the future returns.
The bottom line is that while investing through SIP you should ask yourself few questions.
- Why am I Investing?
- How long can I invest?
- What Should be the right amount?