What is SIP investment?
A systematic investment plan (SIP) allows you to put a small amount in your favorite mutual fund scheme monthly. For Example – With a minimum SIP amount of Rs.500, you can start investing. There is one common question among many beginner investors. That is – how much SIP is good? The easy answer is – Invest at least 20% of your salary. A predetermined sum will be deducted from your bank account every month when you activate a SIP, and it is invested in the mutual fund of your choice. You don’t need a big lump sum of money to get started investing in mutual funds using SIPs.
How to start SIP?
To begin with, saving for an emergency fund should be the top priority, even before you start investing. It may be the entire amount needed to cover monthly costs for the next 4-6 months. After the emergency fund has been established, additional investments should be made to achieve other financial objectives. Ideally, the SIP should be tied to specific financial goals.
Before you start a SIP into any mutual fund scheme, ensure that the objectives and risk levels of the mutual fund scheme you’re considering meet your risk tolerance and profile. You can start a SIP once you’ve determined that a mutual fund is appropriate to your investment needs. You’ll need a bank account that you can link to your investing account. You can use ECS or give your bank standing instructions to transfer a specific amount from your account into the mutual fund scheme of your choosing on preset dates to make the SIP investment process go smoothly.
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Investing through SIPs
Investing through a SIP is not that complicated, but how to decide the amount you need to invest?
SIPs will differ from person to person based on different criteria. For example, every person has different financial goals: some will Invest In SIP for long-term wealth creation, and others for their defined goals or children’s education.
So, one should plan their SIP amount according to their financial goals. The investor should identify their financial objectives and then prioritize them based on their importance. This will be the first step before thinking of where to invest and how much to invest.
SIP for defined goals
It’s easy to figure out how much to invest through SIPs after you’ve set your goals. SIPs are one of the best ways to invest money. You can select a SIP plan based on your requirement. Investing in a SIP for an extended period will be more beneficial.
- Short-term goals
- Rent and insurance.
- Payments on credit card debt.
- Personal goods.
- Travel.
- Wedding.
- Home renovations and minor repairs.
- Long-term goals
- Retirement fund.
- Paying off a mortgage.
- Starting a business.
- Saving for a child’s college tuition.
For example, if you have 2 goals to fulfill. Now prioritize the goal based on the amount required and time horizon. Begin by identifying the aim or goals you want to achieve. After that, assign a time frame to it, such as five years for goal A, eight years for goal B, and so on. Then give values: objective A will require Rs. 15 lakh in 5 years, whereas goal B will require Rs. 20 lakh in 8 years. Assume a fair annualized rate of return, such as 12% annually.
A monthly SIP of Rs. 6,000 is required for goal A, whereas a monthly SIP of Rs. 5,000 is required for goal B. If these are the only two objectives you wish to pursue, your SIP amount should be Rs. 11,000 each month.
Calculate this as a percentage of your monthly payment; ideally, your savings should account for at least 30% of your monthly income. If it’s lower, top it up with the difference that can be used to build long-term wealth. If it turns out to be higher, cut back on your spending and begin saving more.
50:30:20 Rule
Every earning individual should follow the 50:30:20 principle in their financial planning. This is critical, particularly for breadwinners. By enforcing this rule, they will secure a good future for themselves. The 50:30:20 guideline suggests that 50 percent of your money must be spent on needs, 30 percent on wants, and the remaining 20 percent must be allocated to develop an emergency corpus.
Needs are those things that you can’t live without in your day-to-day existence. Groceries, house rent or EMI, utilities, and other expenses fall under this category. Needs are never negotiable, and you have no option but to spend on them. Wants are things that aren’t strictly required, yet you utilize them to improve your life. Vacations, movie tickets, and internet streaming site subscriptions are just a few examples. Anybody should spend as little money as possible on wants.
The remaining 20% of your income should be set aside to create an emergency fund at least three times your monthly wage. After everything is completed, you may begin investing. As a result, 20 percent of your monthly salary should be invested in mutual funds. If you can reduce your spending on desires, you may put that money toward boosting your mutual fund investment.
Conclusion
The 50:30:20 principle should be incorporated into your financial strategy. A minimum of 20% of one’s salary should be invested in mutual funds, with the possibility of increasing this later. Inflation has made it necessary for investors to consider solutions such as mutual funds to avoid their investment losing value over time. Visit WealthDesk to pick the plans suitable for you.
FAQ’s
It is suggested to invest 20-30% of your income towards investments to achieve your financial goals and beat inflation.
50:30:20 principle is the best way to allocate your funds. This rule helps to separate your funds based on priority.
A systematic investment plan (SIP) allows you to put a little amount in your favorite mutual fund scheme every month.
Returns on SIPs are not constant. They are entirely based on market conditions. Large-cap equities are anticipated to return 12-18% on average, while mid-cap equities are likely to return 14-17% on average. A long-term debt-based mutual fund, on the other hand, can expect a 6–9% annual return.
