Mutual funds offer a safe investment option in the long run. If you want to create wealth in the long term, you should bet on mutual funds. You can invest in mutual funds either by investing a lump sum amount or by investing through SIPs (Systematic Investment Plan). If you want to know more about Lump sum investment & investment through SIP then I suggest you to read “Is it a Good Time to Start Investing?“.
People are clear about the lump sum investment as whatever the savings they have, they invest it as a lump sum. But when it comes to investment through SIPs then one must know what is the ideal SIP amount to invest in mutual funds. There is no universal answer for this question.
The ideal SIP amount solely depends on what are your future goals. The ideal amount will vary depending on your goals. Some of those goals may be listed below:
- Tax saving
- Accumulating retirement funds
- No fixed goals (For beginners)
Let’s discuss these goals one by one.
If your primary goal is tax-saving then section 80C allows individuals to claim a tax deduction of up to Rs. 1,50,000 from their gross income. Section 80C also includes Fixed Deposits, National Pension Scheme, Life Insurance, etc. in addition to the tax-saving mutual funds. The deduction limit of Rs. 1,50,000 is the gross amount for entire section 80C items and not for the individual items. If your gross invested amount in other section 80C items already exceeds Rs. 1,50,000 (Rs. 2,00,000 in case you have invested in NPS) then you need not invest in tax saving mutual funds. You should invest in other types of mutual funds in such a scenario.
On the other hand, if you have not invested much in FDs, NPS, and life insurance or if your invested amount is very less then you can opt for tax-saving mutual funds.
Assuming your investment in other section 80C items to be negligible. The maximum amount you can invest to be eligible for tax saving is Rs. 1,50,000.
So ideally you should invest Rs. 1,50,000/12 = Rs. 12,500 per month.
There is an assumption for the above calculation. It is assumed that your taxable income is Rs. 6,50,000 per annum or more. Tax will be deducted only if your total taxable income exceeds Rs. 5,00,000. So, if your taxable income is more than Rs. 6,50,000 then only you need to invest the maximum Rs. 1,50,000 in tax saving mutual funds. If your taxable income is Rs. 6,00,000 then you need to invest only Rs. 1,00,000 per annum, which equates to somewhere around Rs. 8,333 per month. Thus, you should only invest the excess amount in case your taxable income is below Rs. 6,50,000.
Of course, you can always invest more! But here we are talking about tax saving and your additional investments are not going to make an effect on your tax saving. Also, the amount I have shown can be distributed between the NPS, Bank FDs, and tax saving mutual funds. Since we are discussing mutual funds, I have shown only tax saving mutual funds only in the above example.
Be careful while you are investing! Not all mutual funds are tax saving funds. Only the ELSS (Equity Linked Saving Scheme) mutual funds are eligible for tax benefits under section 80C. Invest wisely!
Accumulating Retirement Funds
If you are in your early 20s and want to retire early then you should plan your investments accordingly. The ideal amount for investment also depends on how much money you want to accumulate by the time you retire. So, there are basically two factors that will affect your invested amount:
- Your current age and the age by which you want to retire
- The amount of money you want to accumulate
Assuming your current age to be 25 yrs. and your retirement age to be 40 yrs.
Also assuming the amount of money you want to accumulate at the end of your retirement to be Rs. 2 crores.
So, if you are 25 yrs. old now and you want to accumulate Rs. 2 crores by the time you turn 40, then you must invest at least Rs 30,000 per month in the mutual funds. The ages considered are just for an example. If you are 30 now and you are considering retiring after 15 yrs then the same table holds true for you as well. This table basically gives the idea about how much minimum amount you need to invest per month for the next 15 years to generate Rs. 2 crores.
If you want to know why I have taken the rate of interest to be 15% then please read “Can Investing Make Me Rich?”.
The SIP of Rs. 30,000 per month seems too much?
Well! There are only two ways to generate more wealth, either invest more or start early.
If Rs. 30,000 per month is out of your budget then you have to start early or delay your retirement.
Considering the new retirement age to be 20 years after the start of the investment, e.g. If you are 25 yrs old now then considering your retirement age to be 45 yrs.
As we can see that if you delay your retirement by just 5 years, you can reduce your ideal SIP amount to Rs. 15,000 per month i.e. half of the previous value. Also, Rs. 15,000 per month is a much more affordable amount to invest as compared to Rs. 30,000 per month.
The SIP of Rs. 15,000 per month still seems too much?
Let’s delay our retirement by 5 more years and check what is the minimum SIP amount we require to generate Rs. 2 crores.
As again we can see that by just delaying our retirement by 5 yrs we can reduce our SIP by half.
If we keep increasing the retirement age and summarize the data then it will show up as below:
So, if you are 25 years old and planning for standard retirement i.e. at the age of 60 then you have to invest just Rs. 1500 per month to generate a corpus of Rs 2 crores. That’s why they say the earlier you start the better it is.
No fixed goals (for beginners)
If you are a beginner and have no idea about how much money you should start with then you can start with investing Rs. 500 or Rs. 1000 per month. Once you are relatively comfortable then you can start investing 10% of your in-hand salary. For example, if your monthly take away salary is Rs. 30000 then you can start investing Rs. 3000/- per month as SIP. When you are fully comfortable then you should fix your goals and plan your SIPs as mentioned above.
We have seen that the ideal SIP amount for investing in mutual funds depends solely on your goals and how early you want to achieve them. We have also seen that starting your SIP 5 years earlier can reduce your required minimum SIP amount to half. Time is the key factor here for the long term investment. I would suggest you start investing from now itself. The earlier you start, the better it will be for you to manage your finances.