How do you get from goal to SIP amount: Part 1
Walk-through: Get the SIP amount for a single payment goal
How do you get from goal to SIP amount: Part 1
Posted on 04 Jun 2021
Author: Sayan Sircar
6 mins read
📢Join 3500+ readers on WhatsApp and get new post notifications!
Walk-through: Get the SIP amount for a single payment goal
📚 Topics covered:
- Asset allocation and target return for a goal
- Find the SIP amount for a goal
- After one year of running the SIP
- Does this process work in real life?
- How to implement this process in practice?
- A note on having the pre-requisites in place
- All posts in this series
Asset allocation and target return for a goal
We have already covered
In this example, we will consider a single payment goal like a foreign vacation, buying a car, kid’s marriage or for the down-payment of a house.
Taking the example of a house down-payment as a goal, let us construct this example:
- Asset allocation: equity = 30%, debt = 70% « comes from the risk profile of the goal
- Horizon (H): 10 years « the house will be bought after 10 years
- Cost today (C): 20 lakhs « the down-payment is for 20 lakhs if bought today
- Inflation (I): 5% « the house price is expected to rise at this rate
- Lump-sum available (L): 3 lakhs « money available for investment today
- Investment return (R): 4.63%/year « the average return over the next 10 years [we will cover getting to this number in a future post]
- SIP amount will be increased by 10% every year, as a step-up SIP, which keeps the starting amount for the goal lower and let it increase with time
Find the SIP amount for a goal
Future Value = Current Value * (1 + Inflation) ^ TIme_to_goal
When the house is actually bought, due to 5% inflation over 10 years the down-payment will be higher. Let us call this future value (F)
F = C * (1+I)^H = 20 * (1+0.5)^10 = 32.58 lakhs
So we need to invest monthly an amount of ₹ 12,089 (as per the calculator linked below) in equity and debt. Based on the return expectation of each of the funds chosen and the asset allocation, you can arrive at a return expectation for the investments as per this post: How much returns should you estimate for your goals?.
This is the SIP amount assuming constant investment every year. Typically people increase their investments every year by 10% and the same is assumed here. The starting value of L i.e. 3 lakhs should be invested via this method as per asset allocation (E=30%, Debt=70%) as per the choice of equity and debt funds.
Once this is done, the following will be completed:
- equity fund allocation of 30% of 3 lakhs = 0.9 lakhs in equity
- debt fund allocation of 70% of 3 lakhs = 2.1 lakhs in debt
- SIP of 30% of ₹ 12,089 = ₹ 3,627 in equity fund for 12 months
- SIP of 70% of ₹ 12,089 = ₹ 8,463 in debt fund for 12 months
These calculations are explained in this Google Sheets workbook which has a few worked-out examples for more goals.
After one year of running the SIP
The following needs to be done in this order:
- find the new corpus (C) which is the sum of the current value equity and debt fund values
- review the goal parameters (new horizon is 1 year less, review the current cost of the house to adjust the down payment etc.)
- check the new asset allocation
- re-balance between the equity and debt fund values
Repeat the steps in the “Find SIP amount for a goal” section above with these new values. See this detailed post for the process
This article is part of our Series on “How to purchase a home”:
- How to calculate the SIP amount for the downpayment of your dream home? « this article
- Should you sell your mutual funds to buy a house?
- Goal-based investing: check if you can purchase your dream home
- Where to save for the downpayment of a home?
- Should you stretch to buy your dream home?
- What is the best home loan tenure?
Does this process work in real life?
Single case of a 15-year goal
We show this example of a goal for which investment was started in 2007. Every year, the invested amount was increased by 10%, and the asset allocation was made more and more conservative over time. We can see how the equity allocation was reduced to zero as the goal moved closer.
The key learning here is that the variability between the actual and theoretical portfolios slowly came close to zero over time.
For all maturities
We see that except for goals maturing before 2008, in all other cases, the return has been higher than the theoretical return like this:
But there has not been a single case where the ending value has been lower than the starting value:
Read more: Goal-based investing: does it work in India?
How to implement this process in practice?
We have covered the practical aspects of investing for a goal like this in detail here: How to invest for a single goal using Target Date Funds in India?.
A note on having the pre-requisites in place
At all times ensure that you have the following in place
- An emergency fund with 6-12 months of expenses
- A term insurance policy (unless you are retired with no income)
- A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
- A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
- No high-interest debt like credit card or personal loans
All posts in this series
Please see below:
- how and why to set a goal
- how to get asset allocation for a single goal
- how to get the SIP amount for a single goal
- how to get the SIP amount for a goal with multiple payments
- how to get the SIP amount for traditional retirement
- how to get the SIP amount for early retirement
- how to get the SIP amount for all goals together
- how to get the SIP amount for recurring goals like vacations
Related Articles
- How do you get from goal to SIP amount: Part 2
- How to go for a foreign vacation every 3 years?
- How do you get SIP amount for complete portfolio: Part 5
What's next? You can join the Arthgyaan WhatsApp community
You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.For resident Indians 🇮🇳:
For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:
Share on WhatsApp: To understand how this article can help you:
If you have a comment or question about this article
The following button will open a form with the link of this page populated for context:If you liked this article, please leave us a rating
The following button will take you to Trustpilot:Discover an article from the archives
Previous and next articles:
Latest articles:
Topics you will like:
Next steps:
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled How do you get from goal to SIP amount: Part 1 first appeared on 04 Jun 2021 at https://arthgyaan.com
We are currently at 503 posts and growing fast. Search this site: Copyright © 2021-2024 Arthgyaan.com. All rights reserved.