Over the past few years, mutual funds have gained immense traction among investors. Mutual funds not only offer benefits of diversification by allowing you to invest in different industry sectors but can also accelerate wealth creation.
Systematic Investment Plans (SIPs) are regarded as a preferred investment mode for mutual fund investments. But, how do you decide the ideal SIP amount to meet your financial objectives?
This article takes a look at the importance of choosing the ideal amount of SIP investments to reach your goals.
Investing in mutual funds via SIPs
SIPs work best when you stay invested for the long run. This is because your funds get more time to compound and build a substantial corpus. However, just because SIPs do well in the long-term, it may not guarantee you reach your goals.
Let us consider an illustration to understand this.
Say, you wish to amass Rs.1 crore in 15 years. You invest via monthly SIPs of Rs.10,000 for the next 15 years to reach this goal. But is that sufficient? Unfortunately, no. Even if we assume an annual rate of return between 10% and 12%, your earnings by the end of 15 years would reach Rs.41 to Rs.50 lakh. And, your goal to create a corpus of Rs.1 crore is not achieved. This is why investing the right sum is critical.
In the same example above, if you invest Rs.20,000 – Rs.24,000 monthly instead of Rs.10,000 you could reach your goal of Rs.1 crore in 15 years assuming the same rate of return.
What is the most common mistake to avoid when investing via SIPs?
Often, investors begin with monthly SIPs of, say, Rs.2,000 when their incomes are Rs.30,000 per month. However, they continue with the same SIP amount even when their revenues reach Rs.1 lakh a month. It is advisable to increase your SIPs by 5% to 10% every year to attain a larger corpus.
In the example stated above, if investors enhance their SIPs by 10% every year, their final corpus after 15 years could reach Rs.74 – Rs.87 lakh. Thus, by increasing your SIP amounts, you could reach your corpus amount much earlier. Consider taking the help of a professional financial advisor or use a SIP calculator online to ascertain how much you need to invest.
If you are a new investor looking to invest via SIPs in mutual fund, you can start by reading on what is a mutual fund and how to invest in SIP. With confidence, you can start by investing small SIP amounts and gradually increase them as your income rises. This can help you reach your financial planning goals in a shorter time frame.