Make sure your SIP is right

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By Nimesh Shah
Managing Director & CEO
September 17, 2014
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If you have dreams in your life that you are willing to accomplish, there is no running away from taking small but steady steps in the right direction. On our journey to fulfill these dreams, it is important to keep in mind that we are all different from one another; germinating different needs and desires within us. Therefore, a financial plan that worked for someone may or may not work for you. The right way to go about building your wealth is to create your own financial plan aligned with your future goals. For the same reason, when investing in mutual funds, rather than going by hearsay or advice from kith and kin, work out the right amount to be invested in an Systematic Investment Plan (SIP), that fits well in your financial plan.


SIP is the most favorable tool to help you build an investment corpus for long term while investing in Mutual Funds. More often than not, investors are in a dilemma, as to when they should enter the market worrying that their portfolio would lose value if their entry in the market is at a wrong timing. If you play the waiting game, and look for opportune moment to invest, you might end up not investing at all. SIP helps averaging out the returns, and inculcates investment discipline amongst investors.


Factor in inflation


With costs of living escalating rapidly in India, families often find themselves stretched when the time comes to fulfill their aspirations especially when the amount they planned to set aside for their financial goals, proves to be insufficient for the required corpus. Thus, an effective practice is to know the right amount that needs to be regularly invested, to meet financial goals for the future. In order to decide the right SIP amount, first get a fix on your target amount and then work backwards to ascertain how much money you need to put aside every month.


Since the funds would be required in the coming years, a rising inflation can chew into your portfolio returns. For instance, if you have started investing now for your daughter’s marriage, an expenditure of around Rs 10 lakh presently, growing at an inflation rate of 7 per cent a year, will be equal to close to 20 lakh after 10 years. Therefore, assuming that your investments will grow at 12 per cent, you need make an SIP of around 4,000 per month to reach that goal. This means when deciding the right amount apart from knowing your financial goal and investment horizon one needs to also quantify goals while accounting for inflation.


While arriving at the RIGHT SIP AMOUNT here ask yourself - What am I investing for? How long should I invest for? What should be the RIGHT SIP Amount to achieve my goal? Because, a Systematic Investment Plan (SIP) makes sense only when the amount invested helps in realizing your dream. Investors could make use of wealth creation tools like SIP calculators in order to arrive at the right amount of SIP, or seek guidance from a financial advisor for the same.


This article was published in Hindu Business Line newspaper on August 25 2014


 

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