When you started investing in mutual funds, your first brush was with tax-saver ELSS funds. And maybe you started with a small monthly systematic investment plan (SIP) of a few thousand (say ₹3,000-5,000) to test the waters. In a few years, you saw the growth (potential) of mutual funds and decided to invest more. And now, you invest ₹15,000-20,000 per month.
Let me use a very simple example to explain this.
Suppose you are a married 33-year-old individual drawing a monthly salary of ₹1.4 lakh. Your regular monthly expenses are ₹80,000 per month and hence, you have a monthly surplus of ₹60,000.
Like many other mutual fund investors, you too do a monthly SIP (of ₹15,000). You feel good about it as you are at least ‘saving something’ instead of spending it all.
You also have a few goals that you wish to get serious about. First is house purchase. You want to have a down-payment amount of ₹15 lakh in four years’ time. The second is your child’s higher education, for which you have kept a target of ₹50 lakh in 12 years. The third goal is your own retirement in your hometown (for which you estimated ₹4 crore) in 20 years.
From the size of your goals, it should be clear that a ₹15,000 monthly SIP will never be enough to meet all these goals. So, what is required actually?
For this, you can do some number crunching yourself (or check with an investment advisor). But to complete our example, here is what is needed for each of your goals:
₹25,000-26,000 per month for 4 years to accumulate your house downpayment (at 20:80 equity:debt allocation).
₹18,000-19,000 per month for 12 years for child’s education (at 60:40 equity:debt).
₹56,000-57,000 per month for 20 years for retirement (at 60:40 equity:debt).
So, in total for all the three goals, you need to invest a little over ₹1 lakh per month. And this is the ‘correct’ SIP amount that we started this whole discussion with. And that is what will help you reach your goals.
But the issue is that you only have ₹60,000 available (as surplus) each month. And you are only investing ₹15,000 per month out of that. But what we need is ₹1 lakh.
So, there is a big disconnect between what is available, what is required and what you are doing currently.
Since sufficient resources aren’t there to fully fund everything, we shall pursue what has higher priority.
So here is how the ₹60,000 can be used every month: ₹25,000 per month for the house downpayment; another ₹20,000 for the child’s education. And the remaining ₹15,000 per month for your retirement.
While the goals of house downpayment and the child’s higher education are being sufficiently funded, the retirement goal takes a backseat. You are investing ₹15,000 for it versus the requirement of ₹56,000-57,000 as per the calculations.
But that is fine as there are two things to remember.
First that you may be saving some money via EPF (employee provident fund) already every month towards retirement. Also, your income and surplus will increase each year. So, you can increase your retirement savings in years to come by stepping up your SIPs. And once your other goals are done (like the child’s higher education in 12 years), you will still have several more years to compensate for earlier years of less savings towards retirement.
So that’s how you go about finding the right SIP amount. Remember, that doing SIP every month is not enough. The right SIP amount is the one that actually helps you reach your financial goals.
But in this SIP-based discussion, let’s not forget that after a few years of SIP accumulation, your portfolio size itself will be a much larger figure than the monthly SIP figure. So, you need to ensure that you periodically review your existing portfolio and, if need be, rebalance it as well.