Systematic Investment Plan (SIP) is a popular and disciplined approach to investing in financial markets, particularly in mutual funds. It allows investors to regularly contribute a fixed amount of money at predefined intervals, typically monthly or quarterly, into a chosen mutual fund scheme. SIPs are known for their simplicity and accessibility, making them a favored option for both seasoned and novice investors.
Adding goals while doing a Systematic Investment Plan (SIP) is important for several reasons. Let's consider an example of a home loan clearance goal to understand the significance of setting goals and incorporating SIP.
Goal: Clearing Home Loan in 10 Years
Scenario:
Assume you have taken a home loan of Rs. 50 lakh for a tenure of 20 years at an interest rate of 8% per annum. You want to clear the home loan within 10 years instead of the original 20-year tenure.
Approach:
To achieve this goal, you can combine the power of SIP and a lump sum payment towards the principal amount of the loan.
1.Calculate Monthly Installment:
Using an online EMI calculator or the loan's amortization schedule, determine the monthly installment for a 20-year tenure at an 8% interest rate. Let's assume the EMI comes out to be approximately Rs. 43,391.
2.Monthly SIP Contribution:
Next, decide on the monthly SIP contribution amount that you can comfortably afford while paying the EMI. Let's say you can contribute an additional Rs. 10,000 per month towards SIP.
3.Invest SIP Amount in Equity Mutual Funds:
Invest the SIP amount of Rs. 10,000 per month in equity mutual funds. Considering an average annual return of 12% over the long term, the SIP investment can potentially grow significantly.
4.Lump Sum Principal Payment:
Additionally, aim to make an annual lump sum payment towards the principal amount of the home loan. Let's assume you can allocate Rs. 1 lakh per year for the lump sum payment.
5.Revised Loan Tenure:
By following the above approach, you can aim to clear the home loan within 10 years. This means you would need to pay the EMI of Rs. 43,391 every month for 10 years, while also making an annual lump sum payment of Rs. 1 lakh.
We can have many goals like children education, property buying etc and use SIP as a vehicle to achieve them
Benefits:
By combining the SIP investment and the lump sum principal payments, you can reduce the outstanding loan amount significantly over time. The investment growth from the SIP can potentially offset a portion of the loan liability, accelerating the home loan clearance process.
In summary, incorporating goals while doing an SIP helps provide clarity, focus, and a structured approach to your investments. Setting a specific goal, such as clearing a home loan in a certain timeframe, allows you to align your investments and contributions accordingly. It helps you monitor progress, stay motivated, and customize your investment strategy to achieve your desired financial objectives.
Please note that this example is for illustrative purposes only, and the actual figures may vary based on individual circumstances, interest rates, and investment returns. It's advisable to consult with a financial advisor to assess your specific situation and determine the best approach for your home loan clearance goal.
You can check our calculator for more real time values for your goals
