The secret is wealth creation is starting early with saving and ensuring that you invest a portion of what you save regularly. Some people feel that savings alone are sufficient to build a long-term corpus, but the truth is that inflation tends to consume most of what you have saved over the years. This is why a lot of financial advisors suggest people start investing according to their risk appetite.
Even today, a lot of Indians rely on conventional investment avenues like PPF and bank FDs to target their long term and short-term financial goals. However, the interest rate on these is so low that it becomes almost impossible to achieve a wealthy corpus by solely investing in these. Investors need to diversify their investment portfolio with market linked schemes like mutual funds.
Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities to generate returns. Mutual funds do not guarantee returns and hence investors should invest according to their risk appetite. To allow themselves to invest small sums regularly so that they can achieve a wealthy corpus over the long term, investors can consider starting a SIP in mutual funds.
What is SIP?
Systematic Investment Plan or SIP is a simple and convenient investment approach where retail investors can invest small fixed sums at periodic intervals and try to build wealth over the long term. SIP can make you rich by invest very low sums monthly. Nowadays, with a monthly investment sum as low as Rs. 500 retail investors can create wealth via SIP if they continue to invest regularly till their investment objective is accomplished.
Now, investors can even make use of the SIP calculator to determine how much they need to invest to achieve the targeted financial goal.
What is SIP Calculator?
When you are investing for an investment horizon spanning over 5 to 7 years, you need to know how much wealth you are can create with the SIP at the end of your mutual fund investment journey. Here’s an example of how a SIP calculator helped Saroj achieve her ultimate goal of buying a dream home.
Saroj wanted to buy her dream home which cost around Rs. 30 lakhs at the time she started investing. Saroj knew that inflation will amount to the same house to cost Rs. 50 lakhs 20 years from now. She knew she had to build a corpus of Rs. 50 lakhs but wasn’t aware of how much she needs to start investing so that at the end of her investing journey she has collected the desired corpus.
Saroj took the help of an online SIP calculator which needed her to answer a few simple questions:
- How much money does she want to earn totally?
- How much is she currently investing in mutual funds via SIP?
- For how many months she will be investing this SIP sum?
- What is the average rate of return expected from the mutual fund scheme?
Once she provided all the necessary details, Saroj realized that she needs to start investing Rs. 5600 per month if she wants to build a corpus of Rs. 50 lakhs assuming the mutual fund scheme will deliver a 10% average rate of return throughout the investment horizon which is 20 years.
She was only investing Rs. 4000 earlier, but after using the SIP calculator she realized that she would not be able to buy her dream home if she didn’t invest adequately.
SIP calculator doesn’t take into consideration expense ratio or exit load (if applicable) and investors must note this before using it to draw an estimate on their overall returns.