How do you get from goal to SIP amount: Part 1
04 Jun 2021 - Contact Sayan Sircar
4 mins read
Walk-through: Get SIP amount for single payment goal
Table of Contents
- Asset allocation and target return for a goal
- Find SIP amount for a goal
- After one year of running the SIP
- 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 foreign vacation, buying a car, or down-payment of a house.
Taking the example of house down-payment, 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 which keeps the starting amount for the goal lower and let it increase with time
Find 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 Excel calculator linked below) in equity and debt.
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 choice of equity and debt funds.
Once this is done, the following will be complete:
- 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?
Our new Goal-based investing tool will help you to create and manage all of your goals in one place. Click the image below to get access:
Arthgyaan creates a system for reaching your financial goals by sharing simple, actionable advice backed by research and analysis.
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 base policy with a 50-100 lakhs super-top up
- 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 SIP amount for a single goal
- how to get SIP amount for a goal with multiple payments
- how to get SIP amount for traditional retirement
- how to get SIP amount for early retirement
- how to get SIP amount for all goals together
- how to get SIP amount for recurring goals like vacations
Previous and Next articles:
Set a goal before looking for what to invest in
The purpose of investing is to fulfil a life goal: set that first
Published: 3 June 2021
5 MIN READ
How do you get from goal to SIP amount: Part 2
Walk-through: Get SIP amount for a goal with multiple payments
Published: 5 June 2021
3 MIN READ
How to use the Cost Inflation index (CII): latest value and historical rates
This article shows the latest as well CII value and shows you how to use it for calculating capital gains tax.
Published: 29 June 2022
2 MIN READ
Asset allocation for NPS: equity or debt / active or auto?
This article provides guidance on choosing the right combination of equity and debt along with allocation plan for NPS subscribers.
Published: 22 June 2022
6 MIN READ
Topics you will like:Asset Allocation (18) Basics (5) Behaviour (10) Budgeting (9) Calculator (10) Children (6) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) House Purchase (10) Insurance (6) Life Stages (2) Loans (10) NPS (3) NRI (3) News (5) Portfolio Construction (27) Portfolio Review (17) Retirement (20) Review (7) Risk (6) Set Goals (24) Step by step (3) Tax (10)
1. Email me with any questions.2. Use our goal-based investing template to prepare a financial plan for yourself
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.
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