Building wealth with mutual funds: A guide to calculate your SIP contribution

When it comes to investing, determining the right amount to allocate each month can be a daunting task. However, there are several approaches you can consider to make this decision easier and more effective. In this article, we’ll explore three popular methods for deciding how much to invest every month in the SIP of mutual funds, along with the widely recommended 50:30:20 rule for financial planning.

1. Percentage of Income Approach

The percentage of income approach is a straightforward method that ensures your investments in mutual fund SIPs align with your earnings. A commonly recommended percentage is around 20% of your monthly income. Let’s illustrate this with an example:

For an individual earning Rs 30,000 per month:

Monthly SIP amount = 20% of Rs 30,000 = Rs 6,000

For someone with a monthly salary of Rs 50,000:

Monthly SIP amount = 20% of Rs 50,000 = Rs 10,000

This strategy maintains a proportional relationship between your SIP investments and your income, allowing your savings invested in mutual funds to grow alongside your earnings.

2. Goal-Oriented Approach

The goal-oriented approach involves investing the amount necessary to reach specific financial goals. For instance, suppose you aim to accumulate Rs 50 lakh for your child’s education in 15 years, with an assumed growth rate of 12%. To calculate the monthly SIP amount required, you can use the formula for the future value of an annuity:

Monthly SIP amount = (Future Value × Rate) / (1 + Rate) Time – 1

Substituting the given values:

Monthly SIP amount = (50,00,000 x 0.12) / (1 + 0.12)15 – 1

Monthly SIP amount = Rs 10,500

By investing approximately Rs 10,500 monthly in mutual funds through SIP, you can achieve your desired educational fund goal.

3. Budgeting

Budgeting is a practical method that allows you to prioritize investments over non-essential expenses. Creating a budget of your monthly necessary expenses and investing a percentage of the surplus can ensure consistent saving and investment habits. Here’s how it works:

Let’s say your monthly income is Rs 50,000, and your necessary expenses amount to Rs 20,000:

Surplus = Rs 50,000 – Rs 20,000

= Rs 30,000

Investing 60% to 70% of this surplus:

Monthly SIP amount = 60% to 70% of Rs 30,000 = Rs 18,000 to Rs 21,000

This approach encourages disciplined spending and fosters a habit of regular investing, ultimately contributing to long-term financial stability.

The 50:30:20 Rule

In addition to the above methods, the 50:30:20 rule provides a comprehensive framework for financial planning. This guideline suggests allocating 50% of your income to needs, 30% to wants, and reserving the remaining 20% for savings and investments.

By adhering to this rule, individuals can ensure a balanced approach to managing their finances, and securing their future through prudent investment practices.

Conclusion

Deciding how much to invest each month is a crucial aspect of financial planning. Whether you opt for a percentage-based approach, goal-oriented strategy, or budgeting method, the key lies in maintaining consistency and discipline in your investment habits. Additionally, integrating principles like the 50:30:20 rule can provide a comprehensive framework for optimizing your financial resources and achieving long-term prosperity. Remember, investing in your future today is the cornerstone of building a secure and fulfilling tomorrow.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.