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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

How do you get from goal to SIP amount

Table of Contents

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.

Calculation of SIP amount for multiple goals

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”:

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A note on having the pre-requisites in place

At all times ensure that you have the following in place

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Next steps:

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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