Systematic Investment Plan or SIP is a smart and hassle free way of investing in mutual funds. You can invest a predetermined amount at regular intervals like monthly, quarterly and so on. SIPs are not mutual funds. They are a way of investing in mutual funds.
Let’s take a look at types of SIPs in India. Top-up SIP allows you to increase investment amounts in multiples of Rs 500. Flexible SIP allows you to alter the amount you want the Fund House to deduct each month as a contribution. When you start an investment in SIP, you must choose the tenor. If maturity tenor is not specified, the SIP becomes a perpetual SIP. Trigger SIP allows setting up the SIP start date and even redeem and switch SIP.
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See Also: Here's How SIP Can Make You Rich?
SIP calculator helps estimate the size of corpus after a period of time. You must enter the monthly investment amount, tenor of investment and expected rate of return.
Let’s say you invest Rs 10,000 a month in mutual funds via SIPs for 20 years. The expected rate of return is 10%. The maturity amount after 20 years is Rs 76 Lakhs. Use IndianMoney Investment Calculator to calculate the size of your corpus.
If you invest just Rs 10,000 a month for 20 years, you can retire with more than a Crore. (Assumed return of 12.5%). This is the power of compounding or return on return. This is why SIPs are called wealth generators.
See Also: How To Start SIP Investment?
Don’t choose any random amount when investing in mutual funds through SIPs. Invest based on financial goals. Let’s say you want a corpus of Rs 50 Lakhs in 15 years. You can’t achieve the financial goal by investing any random amount. Hope is definitely not a strategy.
Use an SIP calculator to calculate SIP instalments each month. They work out around Rs 10,000 a month for the tenure of 15 years. (The assumed rate of return is 12.5%). SIPs helped accumulate more than Rs 50 Lakhs across tenure of 15 years at an expected rate of return of 12.5%. You are easily able to achieve financial goals.
How do you calculate the amount to invest in mutual funds through SIPs? You have a financial goal of accumulating Rs 50 Lakhs in 15 years. Assume a rate of return of 12.5% to get to this amount.
Now, you want Rs 1 Crore instead of Rs 50 Lakhs in 15 years. With a little bit of calculation (Use SIP Calculator), you get to know the amount you need to get to the target. (Expected rate of return of 12.5%). You must invest around Rs 20,000 a month for 15 years at 12.5% to get to your financial goal.
Many people start investments in SIPs with around Rs 2,000 to Rs 3,000 when they earn around Rs 30,000 to Rs 35,000. They continue with the same amounts even if their salary goes up to Rs 1 Lakh. You must increase SIP instalments in-line with salary hike. An increase of just 5-10% means a massive increase in mutual fund portfolio. Let’s say you start SIP in mutual funds at Rs 10,000 a month for 15 years at expected rate of return of 12.5%. If you increase the amount by just 10% a year the corpus increases to 75-85 Lakhs.
STEP 1: Decide on the amount you need to achieve financial goals. This could be a retirement corpus of Rs 1 Crore.
STEP 2: Calculate the time you have to achieve financial goals. This could be a retirement corpus of Rs 1 Crore in 20 years. The later you start, the less time you have to accumulate the corpus.
STEP 3: Keep inflation in mind when setting financial goals. Inflation is the rise in prices of goods and services with time. Inflation eats up your portfolio. If you get much less than you had expected at retirement, blame it on inflation.
STEP 4: Decide on an accurate expected rate of return. Be conservative when assuming this rate to be on the safer side. Take 10-15% when choosing expected rate of return.
There is nothing like the right date to invest in SIPs. It depends on your comfort levels. Invest in mutual funds through SIP in the first week of the month. This is the time most people get their salary and there is a lot of money in savings bank account.
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