Building wealth with mutual funds: A guide to calculate your SIP contribution
This article outlines three methods for calculating monthly SIP contributions and the 50:30:20 rule for effective financial planning.
When it comes to investing, determining the right amount to allocate each month can be a daunting task. However, there are several approaches you can consider to make this decision easier and more effective. In this article, we'll explore three popular methods for deciding how much to invest every month in SIP of mutual fund, along with the widely recommended 50:30:20 rule for financial planning.
DSIJ’s 'Tiny Treasure' service recommends researched Small-Cap stocks with Inherent Growth Potential. If this interests you, do download the service details here.
1. Percentage of Income Approach
The percentage of income approach is a straightforward method that ensures your investments in mutual fund SIPs align with your earnings. A commonly recommended percentage is around 20 per cent of your monthly income. Let's illustrate this with an example:
For an individual earning Rs 30,000 per month:
Monthly SIP amount = 20 per cent of Rs 30,000 = Rs 6,000
For someone with a monthly salary of Rs 50,000:
Monthly SIP amount = 20 per cent of Rs 50,000 = Rs 10,000
This strategy maintains a proportional relationship between your SIP investments and your income, allowing your savings invested in mutual fund to grow alongside your earnings.
2. Goal-Oriented Approach
The goal-oriented approach involves investing the amount necessary to reach specific financial goals. For instance, suppose you aim to accumulate Rs 50 lakh for your child's education in 15 years, with an assumed growth rate of 12 per cent. To calculate the monthly SIP amount required, you can use the formula for future value of an annuity:
Monthly SIP amount = (Future Value × Rate) / (1 + Rate) Time – 1
Substituting the given values:
Monthly SIP amount = (50,00,000 x 0.12) / (1 + 0.12)15 - 1
Monthly SIP amount = Rs 10,500
By investing approximately Rs 10,500 per month in mutual fund through SIP, you can achieve your desired educational fund goal.
3. Budgeting
Budgeting is a practical method that allows you to prioritize investments over non-essential expenses. By creating a budget of your monthly necessary expenses and investing a percentage of the surplus, you can ensure consistent saving and investment habits. Here's how it works:
Let's say your monthly income is Rs 50,000, and your necessary expenses amount to Rs 20,000:
Surplus = Rs 50,000 - Rs 20,000
= Rs 30,000
Investing 60 per cent to 70 per cent of this surplus:
Monthly SIP amount = 60 per cent to 70 per cent of Rs 30,000 = Rs 18,000 to Rs 21,000
This approach encourages disciplined spending and fosters a habit of regular investing, ultimately contributing to long-term financial stability.
The 50:30:20 Rule
In addition to the above methods, the 50:30:20 rule provides a comprehensive framework for financial planning. This guideline suggests allocating 50 per cent of your income to needs, 30 per cent to wants, and reserving the remaining 20 per cent for savings and investments.
|
Category
|
Allocation
|
|
Needs
|
50 per cent
|
|
Wants
|
30 per cent
|
|
Savings/Investments
|
20 per cent
|
By adhering to this rule, individuals can ensure a balanced approach to managing their finances, securing their future through prudent investment practices.
Conclusion
Deciding how much to invest each month is a crucial aspect of financial planning. Whether you opt for a percentage-based approach, goal-oriented strategy, or budgeting method, the key lies in maintaining consistency and discipline in your investment habits. Additionally, integrating principles like the 50:30:20 rule can provide a comprehensive framework for optimizing your financial resources and achieving long-term prosperity. Remember, investing in your future today is the cornerstone of building a secure and fulfilling tomorrow.
Disclaimer: The article is for informational purposes only and not investment advice.