How to decide your SIP amount?

SIP or Systematic Investment Plan is a mode of investment through which one can invest in mutual funds. As the term indicates, it is a systematic approach to investing in fixed amount of money periodically. This method can be followed monthly, quarterly or semi-annually etc. When you invest steadily in this manner, it can become easier to meet your financial goals. While investing through SIP, you invest a fixed sum of money in a given period of time. Such an amount lets you purchase a certain number of fund units. If you continue for a long term, you get to invest in the fund during the highs an lows. For such an investment you do not need to time the market to make your investments. Market timing is a risky job as one can invest at the wrong time. Investing in SIP remove this factor of unpredictability.

The amount of money invested in SIP depends on the answer of how much you want from SIP. Your monthly investment should be the result of:

SIP for defined goals
When your goals are definite, it is easier to know how much you should invest through SIPs. SIPs are ideally set up for long term goals where you need to accumulate savings. SIP should not be started for something you want to achieve 6 months away, investing through SIP for goals more than 2-3 years away is more efficient as it gives you opportunities to invest across market cycles and take management volatility. After defining your goals put a time period to it.

SIP for wealth creation
If you are aware of all your long term goals but you do not have defined amount to work towards then determining this can become vague. If you are investing for wealth creation purpose then you are doing this to have a support in your certain post-retirement. You should at least invest 30% of your monthly income. If you do not have any defined goals or emergency fund needs then you can invest this entire amount in equity. Or you can either mark out the amount required to top up your emergency fund and then invest the rest through SIPs in equity mutual funds.

Human Capital Power
The biggest advantage we have is that our income level does not remain the same throughout. It increases almost every year. So even if we start saving 15% of our income, our investment would also start increasing every year. So keeping this strategy in mind if any investor begins with a smaller sum in an SIP and constantly increases by atleast 10% every year then he or she might be able to reach their financial goals without burdening the current finances.

Benefits of SIP investment

Power of compounding
Compounding begins when the returns you earn on your investments start earning returns. This is a simple theory concept but its practical implications are substantial. When you invest on a regular basis through SIPs then your returns get reinvested. Over the time this result may increase your potential returns manifold. An advised way to maximise this gain is to invest in for an extended period of time. This also means that you may benefit by investing as early as possible.

Less initial investment
You can start investing in mutual funds through a SIP with just Rs 500 per month. This is an affordable way to invest each month without hurting your wallet. You can also increase your monthly investment amount with a rise in your income via SIP step up feature. SIPs can be topped up on regular basis as it is allowed by the mutual fund houses. Such a strategy can help you reach your investment goals at a faster rate.

Rupee cost averaging
This is a concept where you purchase more units when the Net Asset Value (NAV) of the fund is low and lesser units when the NAV is high. Moreover it averages out your purchasing costs over the tenure of the investment period.

Convenience
SIP is a convenient mode of investing. Like many other investors you may not have the time for extensive market research and analysis to adjust or balance your portfolio. So once when you pick a good fund you can give standing instructions to the bank and let the SIP take care of your monthly investments.

How to choose which SIP is best for
Below are some of the following steps that you need to keep in mind while selecting any particular SIP:
The mutual fund that you are choosing has been in the market for at least from the last five years.
The mutual fund you have selected to invest in should be operated. By your bank. And you should cross check this information by verifying the details of the plan from your relationship manager at the bank.
The “fund house” selected by you is reputable and recognizable. In many cases if your fund house if reputable it means it is a green light about its performance and the returns given by it.
The total asset size of the corpus should be huge. This is one of the basics if you are a newbie to the world of mutual funds and finances. For starters you should look for funds with Rs 500 crore. There may be many fund houses that may not have that much capital as their corpus, but the ones that have this figure will be the most reliable ones.
Try following the plan and avoid those which involve risks such as volatility and low liquidity.
One of the best plans proven so far are the ELSS tax savers plans that further allow you to avoid the hefty tax payments and therefore accumulate a large corpus of capital. Look for the funds that have good ranking accredited by CRISIL rated funds. The funds that have the rankings from 1-3 are the ideal ones.

To sum up
To know what is the right amount for SIP, your first step should be to determine your financial goal for which you need a systematic investment plan. Start with a small amount of SIP but ensure that the amount for SIP is increased consistently in line as you income increases.
If have not started investing yet and looking for a broker to or platform to invest in stocks and mutual funds, then start today itself.