How to use SIP for achieving your financial goals

The number of folios in the mutual fund investments have increased manifold specially post demonetisation and there are many reasons for the same.

Some of these reasons are, the huge cash deposit in the system which cannot be used for making FDs due to the much reduced rate of return apart from the stagnant returns over the past many months from the property market and gold, which has made them an unattractive choice.

As you must be aware that most of the retail investors opts for SIPs i.e. Systematic Investment Plans and in this article, I am presenting some of the recent reader’s queries on investing in mutual funds SIPs and how it can help them achieve your financial goals: -

Case-1:  I am 29 years old and can invest at around Rs. 50,000 a month in to SIPs and also plan to increase the amount by 5% every year. One of my important goal and target is to buy a second house by creating a corpus of Rs 5 crore in the next 15 years. Can you please help me plan for it by investing in SIPs? --Abhinav Ghosh

First of all, mutual funds SIP investment will surely help you achieve your financial goals, let me explain you how much corpus can be created based on your porposed  SIP of Rs. 50,000 a month with an increase of 5% every year. Let’s assume that there would be a return of of 15% to 16% on your equity mutual fund investments via SIPs, this is based on the past returns from the mutual funds over many decades. With this run rate, you would roughly create a corpus of Rs. 3.50 Crores which will not help you achieve your desired target. Now in order to achieve your target of Rs. 5 crores, you have two choices, either to increase your planned amount for SIP to Rs. 60000/- from Rs. 50000/-  or increase the yearly percentage rise in the SIP figure to 10% from the planned 5%. 

You can plan to invest your SIPs in more of Mid-caps funds with a combination of some small & large cap schemes. You need to monitor your investments at regular intervals and keep an eye on your targeted amount. You can invest in some of the following schemes like L&T Emerging Businesses, Kotak Infrastructure, Birla Sun Life Top 100 fund, Canara Robecco Emerging Equities Fund, Mirae Asset Emerging Bluechip Fund, SBI Magnum Multicap Fund & Franklin Build India Fund.

Case-2: I am a 35-year-old IT professional and my current expenses are around Rs 1 lakh a month. I plan to retire in the next 20 years so my query is to know that how much amount I would need if I want to pursue the same lifestyle post retirement. --Yash Moghe

Assuming an inflation rate of 7-7.50% annually, your current monthly expenses of Rs. 1 lakh will become around Rs. 5 lakh a month. It means that you need to generate Rs. 60 lakhs every year i.e. Rs. 5 lakh a month after 20 years, which ultimately implies that you have to create a corpus of around Rs. 12-13 crores in the next 20 years for maintaining the same lifestyle. Post retirement, your risk appetite will reduce and you may not take risk the corpus which you create i.e. Rs. 12 Crores needs to be invested in the safe investment avenues say your bank FD which can only provide you a low but safe rate of return in the range of 5-6% which also depends up on the probability of FD returns going down considerably in the coming years.

So your target is to create a corpus of Rs. 12 crores and for which, you have to start an SIP of minimum Rs. 25,000/- and increase it by an average 8-10%. So if we assume the past MF returns of 15% and what the future holds for us in terms of economic growth; then the said target can be achieved.

Rishabh Parakh is a Chartered Accountant and the Chief Gardener & Founder Director of Money Plant Consulting, a leading Tax & Investment Planning Advisory Service Provider. He also runs a personal finance blog called “Mango Investor” aka AAM Niveshak at www.mangoinvestor.com.