Every individual has certain goals and aspirations in life. Short term goals include going for a dream vacation or buying a flashy car whereas long term goals include financial planning for the golden years of life, child’s education or even buying the dream abode. But for turning these dreams into reality we need backing of an adequate corpus. It has been proved time and again that starting with a properly planned investment early in life shoots up the probability of building up the required corpus.
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Systematic Investment Plan (SIP) comes as a full proof answer to all the corpus building woes of investors wherein they can invest a pre-determined sum of money at regular intervals in various mutual fund schemes. This hassle free and smart investing mode inculcates the wealth building and saving habit of investors. SIP keeps the investors abreast of market volatility by its “Rupee Cost Averaging” feature which buys more units when the NAV is low and less units when the NAV is high.
But choosing the right kind of SIP as per the concerned requirement is of utmost importance. Like for long term plans investor’s portfolio should consist of greater equity component and for short term plans, fixed income schemes can provide steady returns. Risk appetite of an individual also has bearing upon the type of SIP he wishes to proceed with. Investors generally find the SIP calculation to be too tricky. But being armed with an excel sheet and the required statistics can give a shape to this magic figure in no time. In today’s article we will provide a step by step guide of how to proceed with the same.
Background checking of the SIP market
- It’s better to go with older funds as they have an historical track record for investors to analyse and take a cue from. The “alpha” yardstick serves as a benchmark for investors to gauge fund performance as a positive alpha shows appreciable fund execution and vice versa.
- It’s also advisable to go for popular Fund houses.
- Expertise of the fund manager has an enormous effect on the performance of the fund.
- Investors can examine the historical performance of funds managed by the fund manager especially during times of crisis.
Deciding on the corpus amount
Investors are required to come up with real figures as mental calculations which provide a false sense of comfort can be very dangerous. The figure needs to have a realistic justification and should not be selected randomly.
Gauging the in hand time
Investors need to have a realistic time frame while proceeding with the investment. Starting with a small corpus and planning to reach the 1 crore mark in two years is simply impossible.
Purchasing power of money decreases with time thanks to the inflation effect. Ten years down the line, a bottle of Pepsi might cost double of what it costs today. Thus investors need to inflate their desired corpus amount in order to ensure enough financial resources for their goal realisation.
The Excel calculation shows that assuming an inflation rate of 7%, investors need to build a corpus whose future value is 7739368.92 INR in a span of 20 years to fulfil a goal which requires 2000000 INR at present.
Expected Return Analysis
It is advisable to maintain a conservative approach while stating the expected return. Investors should not go overboard looking at a particular years bombastic performance but should analyse historical figures of an elongated time frame.
Calculating monthly SIP premium
The PMT formula in MS Excel can be used to estimate monthly SIP premium required to reach the aspired goal. In our example we need to invest 7746 INR monthly to achieve the desired goal of 77,39,369 INR at the end of 20 years.
It’s easy to start with an SIP plan but equally difficult to continue with the same given the ever increasing expenses and other temptations which are a part and parcel of life. Thus investors need to follow a disciplined approach of adding further units without forgetting to set aside some cash for contingencies.
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