Walk-through: Get the SIP amount for a single payment goal

📚 Table of Contents

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• 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?
  • Single case of a 15-year goal
  • For all maturities
• 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

• how and why to set a goal
• how to get asset allocation for a goal

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