The saying, “A journey of a thousand miles starts with a single step,” aptly describes the essence of a Systematic Investment Plan (SIP). A SIP is a simple, convenient and disciplined way to meet your financial goals. It is designed to help investors to save regularly and accumulate wealth in a disciplined manner over a long period.

To make a SIP effective, an investor has to be mindful of the following three principles.

• Start Early: If you start investing earlier, you may generate relatively higher returns and can benefit from the power of compounding
• Invest Regularly: This can help you manage market volatility, as it lets you average out the cost of your investments over time.
• Invest the Right Amount: Often, people start with SIP but are not sure if the amount they are saving each month is enough to reach their goal or not. Sometimes, even after years of SIPing, there are chances that you may fall short of the target amount owing to the wrong SIP amount.  

So, the big question is how can you calculate the right SIP amount?

Calculating the Ideal SIP Amount SIPs don’t demand a large initial outlay. Even a modest sum of Rs. 100 or Rs. 500 can kick-start your investment journey, depending on the chosen scheme. As your income grows, scaling up your SIP contributions is advisable. For instance, at a 12% growth rate, investing Rs. 5000 monthly for 20 years would accumulate to Rs. 50 lakhs. Raising this to Rs. 10,000 or Rs. 15,000 would result in a corpus of Rs. 1 crore or Rs. 1.5 crore respectively.

Key Considerations for SIP Starters Five essential factors should be considered before initiating an SIP:

• Define your financial goal: A clearly outlined goal, such as retirement or children’s education, serves as a guidepost and informs your fund and amount selection.
• Investment timeframe: Determine if your goal is short, medium, or long-term, and select assets accordingly.
• Your risk profile: Investors vary in their risk tolerance, which can be influenced by factors like age and income. Recognizing your risk appetite aids in scheme selection.
• Decide the right scheme: The right Mutual Fund scheme can make or break your investment. Opt for a scheme with consistent performance.

Advantages of SIP

• Market Fluctuations: SIP enables Rupee Cost Averaging, where you buy more units in a downturn and fewer in an upturn, effectively increasing the overall portfolio value.
• No Market Timing: SIP eradicates the need to time the market, minimizing the risks of lump-sum investments made at inopportune moments.
• Minimal Initial Investment: SIP allows you to start with as little as Rs. 100/500, unlike lump-sum investments that demand a higher initial commitment.
• Emotional Discipline: SIP safeguards against emotional decision-making, ensuring long-term benefits.
• Instills Investment Discipline: Regularity in contributions fosters long-term wealth creation and protects against procrastination or premature withdrawal of funds.

In a financial journey marked by discipline, SIP stands as the single step that leads to miles of wealth accumulation.

Disclaimer

The views are personal and are not part of the Outlook Money editorial Feature.

M Praveen Kumar, Managing Director, Future First Financials Private Limited