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How much money do you need to fulfil these financial goals? – Times Now

How much money do you need to fulfil these goals?

How much money do you need to fulfil these goals?& 

Systematic Investment Plans or SIPs in popular parlance are a great way to invest your money in mutual funds. They are time-tested and established investment vehicles to generate wealth in the long term. Basically, SIPs are fixed equated instalments of investments deducted from your bank account periodically for as long as you want and the least one can invest can be as little as Rs.500. 

To get the best result from SIP investments, it is important to identify the appropriate amount that helps in achieving your goals as per stipulated time. 

Often, investors aim for large wealth creation goals but put disproportionately lesser amounts in their SIPs. The result? Some investors discontinue the investments and redeem the amount or do not increase their SIPs. They, thus, miss their financial goals and do not generate the required wealth.

So, how must one decide what the right SIP amount should be? 

It’s fairly simple to calculate what should be your right investment in SIPs. You should start by defining your goals.

Here’s a quick guide to help you.

Set Financial Goals

Before you jump onto the SIP bandwagon, give careful thought to the life goals requiring financial support. This is nothing but your financial goals. It is worth mentioning that financial goals could be several ranging from your children’s education and their marriages, buying a car, buying a house or your retirement plan. Once you have identified your goals and the length of time in which they need to be achieved, assign a value to each one of them. Be realistic while doing this. 

All such goals have different tenures. For instance, if your child is six years old, you may have about 11-15 years to save for their higher education goals. Similarly, for their marriage, it could be 20-25 years. You may want to buy a new car in 5-7 years or buy a house in 15-20 years. For planning your retirement you may have 25-30 years. Hence, to get the desired results it is advisable to define the goal in terms of the money required and time left before the due date.

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How much money do you need to fulfil these goals?

Once you have set your financial goals, you need to rationally calculate how much money would be required to fulfil them. You should then increase your goal amount after factoring in the inflation rate (6-8% approx.) to get an estimate of the required sum. Get an understanding of the price increase after researching the current cost of the goal and the average rate at which it has increased in the last few years.

Risk appetite

Try to understand your ability to take financial risks. This will depend on your age and your attitude when it comes to investments – conservative, aggressive or moderate, which can define your return expectations and influence your SIP choices. Once you are done with the above three parameters, it’s time to figure out what’s the right sum you should be putting in your SIPs.

But before that let’s have a rough estimate for your financial goals.

a) Children’s higher education (two children): Rs.50,00,000  
b) Buying a car: Rs 15,00,000
c) Buying a house: Rs 1,00,00,000
d) Retirement plan: Rs 1,00,00,000
Total: Rs 2,65,00,000

Since all these financial goals have different tenures, some will fulfil earlier while others will take longer. Let us assume if you need Rs 3 crore to fulfil them successfully, here are the three scenarios which will help you decide upon your monthly SIP amount.

Case 1: 

Wealth target: Rs 3,00,00,000 (Rs 3 crore)
Tenure: 20 years (240 months)
Risk appetite: High (aggressive) 
Returns: 15% (CAGR)
SIP amount: Rs 20,000

This could apply if your risk appetite is high you and fall in the category of aggressive investors. With an investment horizon of 20 years to amass a wealth of Rs.3 crore, your monthly SIP amount should be around Rs. 20,000 for the whole tenure.

Case 2: 

Wealth target: Rs 3,00,00,000 (Rs 3 crore)
Tenure: 20 years (240 months)
Risk appetite: Moderate  
Returns: 12% (CAGR)
SIP amount: Rs 30,000

If you are neither aggressive nor conservative, your return expectation is 12% during the tenure of 20 years to generate a wealth of Rs 3 crore, your monthly SIP amount should be around Rs 30,000 during the whole tenure.

Case 3:

Wealth target: Rs 3,00,00,000 (Rs 3 crore)
Tenure: 20 years (240 months)
Risk appetite: Low (Conservative)  
Returns: 8% (CAGR)
SIP amount: Rs. 51,000

If your risk appetite is low and your return expectation is 8%, you will need to have a SIP amount of around Rs 51,000 per month for 20 years to create wealth worth Rs 3 crore.

For investors, who have a target to generate wealth worth Rs 1 crore in the next 20 years, a third of the above-mentioned SIP amount will be required monthly. This translates to Rs 6,700 for an aggressive investor, Rs 10,000 for a moderate investor while a conservative investor would be required to have a SIP amount of Rs 17,000 per month.

Conclusion

Since investment in SIPs is done for long term goals, it is advisable to start at an early stage of life. This would help you enjoy the benefits of compounding and maximising returns. You can consider investing in top-rated equity funds via SIP to get inflation-beating returns. This would also help you invest small amounts without timing the market. Be realistic about return expectation as market returns are never constant. But do this after understanding your financial goals, income, age, investment horizon and risk appetite. You may also take the help of a financial advisor to select the mutual funds or investment instruments that work for you.

Adhil Shetty is a guest contributor. Views expressed are personal.

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