How Much Should I Invest in SIP?

It’s good that Systematic Investment Plans do not set an upper cap on the monthly investment amount. While you can start with as little as Rs. 500 per month, the ideal amount will differ from investor to investor, depending upon a number of factors. To know the answer to, “How much should I invest in SIP per month?” read on.

Define your financial goals

Do you want to build a retirement corpus, an emergency fund, or are you investing to fund your child’s overseas education? Start by answering questions as simple as these. Your short-term and long-term financial goals will help you get a broad sense of how much you should invest and for how long. For instance – To build an emergency fund, investing Rs. 2,000 to Rs. 3,000 per month for just the mandatory lock-in period (three years) will suffice. However, you will need to raise the amount and the investment tenure for post-retirement planning.

Consider your risk profile

Back to the above example, you can only expect to create an emergency fund in three years from SIP if the returns are promising. And it all boils down to the asset allocation of your portfolio. If you take uncalculated risks, you might suffer losses, especially since the investment horizon is short-term, but playing it too safe may not give you the desired results.

Similarly, trying to build a retirement corpus with just Rs. 3,500 and Rs. 2000 a month in mid-cap and small-cap equity funds respectively for 15 years on a moderate risk profile is a bad move. In such a case, you should be investing in multi-cap schemes that offer meaningful exposure to promising sectors or stocks across market capitalisations. But, you must also increase your SIP investments every year or as your income increases to reach your financial goals easily.

Additional Read: How to Top up Your SIP?

Keep tax efficiency in mind

The Income Tax Act’s Section 80 C states that investments of up to Rs. 1.5 lakhs in ELSS funds or Equity Linked Savings Scheme are eligible for tax exemption. You can save up to Rs. 46,800 in taxes. And if you're wondering, "how much should I invest in ELSS?” the answer is, definitely lower than what you might need to invest in non-tax-saving funds.

Implement the 50:30:20 rule

When in doubt, trust the 50:30:20 rule. This rule will help you bypass the confusing bits. How? All you need to ensure is that you reserve 50% of your monthly income for needs like grocery supplies, utility bills, etc., 30% for wants like movies, eating out, and vacations, and the remaining 20% for mutual fund investing. Now, if you wish to invest more, you can then evaluate the first two categories to see where cutting down expenses is possible.

This rule works because it takes care of all aspects of a quality life. But do remember to first invest at least 20% before you make any expenses for the month, lest you’re overpowered by impulse buying.

Additional Read: Why are SIPs an Ideal Choice for the First-time Investor?

Bottom Line

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