Is there an ideal SIP amount to invest in mutual funds and how long should you invest in it?

Posted On: 10 October 2023

Thanks to the growing focus on financial stability and wealth generation, mutual fund investments via Systematic Investment Plans (SIPs) have witnessed a massive surge in popularity. But two questions continue to flummox many investors – "What is the ideal SIP investment amount and optimal duration for staying invested?"

Let’s help you find the answers.

Table of contents

SIP investment: Defining the right amount
SIP investment: Determining the right horizon
What happens if your monthly SIP contribution is high?
When does SIP work
When may SIP not be suitable?
How long should you run your SIP?

SIP investment: Defining the right amount

For many prospective SIP investors, the burning question often revolves around determining the right amount to invest. It is worth noting that there is no universal ‘right answer’ to this inquiry, as the ideal SIP amount is tied to your individual financial circumstances and investment objectives.

How much salary should invest in SIP: As a rule of thumb, financial experts suggest allocating a portion of your monthly salary to SIP investments, usually falling within the 10-20% range. However, it is essential to recognise that this guideline is not set in stone and should be adapted to your unique financial situation.

Is there any ideal amount to invest in SIP: The concept of an ideal SIP amount revolves around striking a harmonious balance between your investment objectives and risk tolerance. The ‘ideal’ amount is one that you can comfortably allocate each month without jeopardising your other financial obligations. Additionally, using an SIP investment calculator can help you determine how different investment amounts, durations, and expected returns might impact your future wealth. This tool provides valuable insights and can guide you in setting realistic investment goals.

SIP investment: Determining the right horizon

After gauging the right SIP investment amount, the next critical aspect is to decide your investment horizon. Historically speaking, the longer one stays invested in the market, the higher the potential for reasonable returns. However, the investment horizon should ideally be related to your goals and objectives.

Compounding: The true essence of fruitful SIP investments lies in compounding. In essence, the longer your funds remain invested, the more they stand to benefit from this. Compounding ensures that your returns also generate returns, thereby exponentially augmenting your wealth over the long term.

Market volatility: It is imperative to remember that mutual funds, like all investment vehicles, are subject to market fluctuations. By maintaining an extended investment horizon, you can position yourself favourably to weather market volatility and minimise the impact of short-term market oscillations.

Goal-based investing: Your investment horizon should intricately align with your financial goals. For long-term aspirations such as retirement planning, an extended investment horizon is highly advisable. Conversely, if you are saving for short-term objectives – like acquiring a vehicle or planning a vacation, a shorter horizon is more appropriate.

Encouraging responsible investing: In the spirit of promoting responsible investing, it is important to reiterate that mutual funds inherently carry risks, and there are no certainties in the world of investments. Thus, it is crucial to seek the counsel of a qualified financial advisor or distributor prior to making any investment decisions.

There is no universally applicable formula for determining the ideal SIP amount or investment duration. Your journey through SIP investments should essentially mirror your unique financial landscape, aspirations, and risk appetite. Invest an amount that you can comfortably allocate each month without destroying your financial stability. Additionally, SIP investments demand patience, discipline, and commitment to the long term. Also bear in mind that compounding works best over prolonged periods. Thus, staying invested for as long as your financial objectives dictate is advisable.

It is equally important to acknowledge the unpredictability of financial markets and the fact that past performance does not guarantee future results. You must always consult a financial advisor or distributor to make well-informed choices. In conclusion, the ideal SIP investment amount and duration are subjective, shaped by your financial aspirations.

What happens if your monthly SIP contribution is high?

Higher SIP contributions can enhance wealth accumulation and help you reach your goals faster. However, it's essential to ensure these contributions are sustainable within your overall financial plan. When your monthly SIP contribution is high, the following may happen:

Accelerated wealth accumulation: Higher contributions increase the amount of money being invested, which allows you to buy more units of the mutual fund. With a larger base, compounding can become more effective, leading to faster growth as you earn returns on both your original investment and accumulated gains.
Potential for higher returns over time: Higher contributions can result in a larger corpus, helping you potentially achieve better returns over the long term.
Faster progress towards goals: Higher SIP contributions can accelerate the process of potentially achieving financial milestones, such as retirement or education funding.

Consider these before deciding on higher SIP amounts:

Sustainability: Make sure the higher SIP amount fits comfortably within your budget.

Financial planning: Reassess your financial situation regularly to ensure the higher contributions are in line with your goals.

When does SIP work

SIPs (Systematic Investment Plans) can work optimally when:

You have long-term goals: SIPs, especially in equity funds, are suitable for goals like retirement or children's education, as the effect of compounding becomes more pronounced over longer periods.
You embrace a disciplined approach: Consistent investing, regardless of market movements, is important for potential success in the long-term.
Patience amid market volatility: Since SIPs invest in market-linked assets, market fluctuations are natural, and staying committed through these ups and downs is important.
Optimal fund selection: Selecting a scheme category that aligns with your risk tolerance and goals is essential.

When may SIP not be suitable?

While SIPs are generally a powerful investment strategy, they may not be the most effective in certain situations:

Short-term goals: SIPs, especially in equity-oriented schemes, are more suited for long-term objectives. If you need funds in a short period (e.g., within a year), the impact of market fluctuations might outweigh the benefits of rupee-cost averaging. For short-term goals, consider fixed deposits or relatively stable debt funds.

Lack of discipline: SIPs require consistent investing. Missing payments or halting investments during market downturns can reduce the benefits of rupee-cost averaging and compounding.

Investing in the wrong fund: Choosing a fund that does not suit your risk appetite or investment horizon can affect returns potential and your investment journey. Conducting thorough research and ensuring the fund aligns with your goals and risk tolerance is crucial.

How long should you run your SIP?

The suitable duration for your a SIP depends on your financial goals and risk tolerance. Here's a general guideline:

Long-term goals:

Retirement: 15-20+ years
Children's Education: 10-15+ years

These goals typically benefit the most from long-term SIPs, allowing ample time for compounding to work and for market fluctuations to potentially even out.

Medium-term goals:

Buying a house: 5-10 years (depending on your down payment goals)
Vacation fund: 3 years

Short-term goals:

SIPs in equity schemes are generally not ideal for short-term goals (within 1-2 years). Consider options like liquid funds or short-term debt funds for better liquidity and lower risk. In such avenues, while SIP options are available, lumpsum investments may offer better return potential.

FAQs:

What is a SIP (Systematic Investment Plan)?

SIP is an investment strategy where an individual regularly invests a fixed amount in a mutual fund at predefined intervals, usually monthly. It encourages disciplined and consistent investing.

What are the benefits of investing through SIPs?

SIPs allow investors to benefit from rupee cost averaging, reduce the impact of market volatility, and instil a habit of saving and investing. They are accessible to both beginners and experienced investors.

Can I modify or stop my SIP investment?

Yes, investors can modify the SIP amount, pause, or stop it at any time, depending on the flexibility provided by the mutual fund scheme. This offers convenience and adaptability to changing financial situations.

What should be the ideal SIP amount?

The suitable SIP amount for you depends on factors like income, financial goals, risk tolerance, and investment horizon. Consistency in contributions and regular reviews of your financial situation are important for harnessing long-term wealth-building potential.

What is the ideal amount to invest in mutual funds?

The suitable mutual fund investment amount depends on personal finances, financial goals, risk tolerance, and investment horizon. Additionally, there are multiple investment avenues, and investors need to determine if they want to invest solely in mutual funds or diversify across mutual funds, bank deposits, provident funds, stocks etc. These factors will determine the suitable mutual fund investment amount.

What’s the downside for SIP investment?

While SIPs offer benefits like rupee-cost averaging and disciplined investing, they may yield lower returns in bull markets compared to lumpsum investments. Moreover, SIPs are still subject to market risks and some funds may have lock-in periods, limiting liquidity. Additionally, SIPs offer limited control over timing, so investors may not be able to fully leverage market gains when compared to lumpsum investments.

Is it possible to increase or decrease my SIP amount over time?

Yes. You can increase or decrease your SIP amount over time through manual adjustments. Also, step-up SIPs allow you to increase your contribution automatically at regular intervals. It's important to regularly review your financial situation and adjust your SIP accordingly to stay aligned with your goals.

How do I calculate the returns on my SIP investment?

To calculate SIP returns, follow these steps:

Gather your data, including the total amount invested, the current value of your investment, and the investment tenure.
Calculate absolute returns using the formula: (Current Value of Investment - Total Amount Invested) / Total Amount Invested * 100.
- For example, if you invested Rs. 10,000 monthly for 5 years, your total investment would be Rs. 6,00,000, and with a current value of Rs. 8,00,000, the absolute return would be 33.33%.
Calculate the Extended Internal Rate of Return (XIRR).
- This method is used to calculate the return on investments where investments are made at different times.
- For this, list all cash flows in one column. Positive values represent cash inflows (like dividends) and negative values represent cash outflows (like SIP investments).
- List the dates of each cash flows in the next column.
- Use the following function in Excel: “=XIRR(values, dates)”, where:
- Values: Range of cells containing cash flows.
- Dates: Range of cells containing the corresponding dates.

Can I invest in multiple SIPs across different mutual funds?

Yes, you can invest in multiple SIPs across different mutual funds. Such an approach can also help you diversify your portfolio across asset classes, sectors, and investing styles. Additionally, you may need to identify different funds for short-term vs long-term goals. Consulting a financial advisor is recommended when planning your investments.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.