Last Updated on May 24, 2022 by Anjali Chourasiya
Systematic Investment Plans (SIPs) allow you to invest in pocket-friendly amounts on a periodic basis to help you attain your financial goals. How SIPs work is that a pre-determined amount is invested in a fund of your choice on a pre-determined date, irrespective of market conditions. SIPs help you automate your investment and also help you to remain immune to market fluctuations and sentiment that may affect your investment decision, thereby promoting investing discipline.
However, when it comes to adequacy, a proper assessment is needed to find out if your SIPs are enough or not. But, how do you do such an assessment? Read further to know. Before you take out your pen and paper, here are some basics that you need to keep in mind.
Table of Contents
The fundamental thing to assess when planning for your investments is your financial goals. Start by analysing your short term and long term goals. This could include intricate planning on known and ambiguous expenses like buying a car, making a down payment on your dream home, taking a vacation, child planning, marriage expenses, instituting emergency funds, saving towards retirement, etc.
Goal identification is like setting a destination, and then, you can set a proper course to reach this destination with your SIP investments.
Once you are through with goal identification, the next step is to estimate the corpus needed to fulfil them. Against each goal, list down the estimated amount required to meet it. Don’t forget to factor in inflation when considering the amount. Mismatching your expenses with your goals can completely derail your financial planning. Hence make sure you closely estimate your long term and short term expenses.
You may reach out to a qualified financial planner should you require professional assistance. With their expertise, they may be able to help you draw the right amount for each of your expenses, keeping in mind your income, financial lifestyle and emergency fund requirements.
Estimate your investment tenure, i.e., how long you can invest to create the corpus you need. You may consider arranging your goals in ascending order, i.e. short-term goals could take precedence over long-term ones. This way, you can focus on saving for the short-term goals first and then move on to saving for the long-term goals.
How to assess corpus requirements for a SIP?
Now that you have the basics sorted, you need to assess if your SIP investments are enough or not. To do that, calculate the expected corpus that your SIP can create within your time horizon, and then match it against the corpus needed for your goals.
Confused? Let’s simplify things with an example.
Say you need Rs. 10 lakh towards the down payment of your home 5 yrs down the line. You are investing Rs. 5,000 every month through a SIP. If you have selected an equity mutual fund and the expected return is 12% per annum, the SIP of Rs. 5,000 could help you accumulate a corpus of Rs. 4.08 lakh (approximately).
This is short of the Rs. 10 lakh that you set out to accumulate through investing. So, your SIP is not sufficient to create the corpus in this case. You would, thus, have to step up your investments. Instead of Rs. 5,000, you would need to invest Rs. 12,250 (approximately) to create the corpus of Rs. 10 lakh, 5 yrs down the line.
You need not do the complicated math manually. With readily available online calculators, you can quickly access the capital required and returns.
Similarly, for other financial goals too, you need to estimate the corpus required, the time horizon and the expected rate of return to find out if your SIP investments are enough or not. So, if you want to create a corpus of Rs. 50 lakh for your child’s higher education, and you have 20 yrs to save, a SIP of Rs. 5,000, every month for 20 yrs, would yield a corpus of Rs. 49.46 lakh, assuming a 12% rate of return.
Tips to ensure adequate SIP investments
To ensure that your SIPs are sufficient for your financial goals, here are some tips that you can use:
Time plays a vital role when it comes to returns on your investments. Since your investments enjoy compounding returns, you can build a considerable corpus with affordable SIPs if you give your investments time.
In our aforementioned example, when you have 20 yrs to save for your child’s higher education, a SIP of Rs. 5,000 is enough to yield a considerable corpus of Rs. 50 lakh. If you delay the investment by 5 yrs, a SIP of Rs. 10,000 would be needed every month for 15 yrs to accumulate the same corpus of Rs. 50 lakh, given the same interest rate. Just a delay of 5 yrs, and the ideal SIP doubles up! This is why the time horizon can be a deal-breaker when SIPs are considered.
So, if you have limited savings at your disposal, start early so that you can save affordably and still create the desired corpus.
Another factor that can make your SIP investments inadequate is random or haphazard investing. When you start a SIP, you should continue it in perpetuity. Do not put a stop to your SIP midway. Remember, to ensure that you can create a sufficient corpus, a long-term horizon is necessary. So, with disciplined SIP investments, you can create the desired corpus.
SIPs also give you the benefit of rupee cost averaging, eliminating the hassle of timing the market.
Step up your investments regularly
To ensure the adequacy of your SIPs, you can opt for the step-up facility. You can increase your SIP investments with time as your income increases. You can opt for step-up SIPs that help you enhance your SIP instalment after predefined intervals.
Alternatively, you can start a new SIP to supplement your existing investments and enhance them. There are multiple financial goals that you might have. To create a corpus for each, increasing SIPs is also a lucrative option.
Assess your goals, their horizon and the corpus that they need. Calculate the corpus that your existing SIP can accumulate. Many SIP calculators are readily available online with features that allow adjusting of SIP value and time duration as well as expected returns to find the perfect balance.
You may consider stepping up your SIP investments to build a larger corpus or reduce your time in the market to meet your financial goals. Moreover, the aforementioned tips may also aid you in ensuring that your SIPs prove adequate in fulfilling your financial goals in both the short and long term.