“The key is to begin…” they say and so I start my savings with a Rs. 1000/- monthly SIP in a mutual fund.
“An end date for the SIP ?” asks the advisor.
“Two years for the time being and then I will decide.”
Two years later….
“I will continue with the same SIP amount. I cannot spare additional cash.” And so the savings continue for another year or so and now I know that there is a lump sum accruing in the account; nothing planned for it, temptation takes over and the next time instead of renewing the SIP, I withdraw the funds.
And here ends the journey to my first million🙄.
1 million = 10 lakhs = 1,000,000 – how difficult can it be? Can be done…here’s how:
Rule #1: SIP with an end in mind
The only goal I had was to put aside Rs. 1000/- from my income and I assumed that the mutual fund manager will do magic and turn my Rs. 1000/- to Rs. 10,00,000/- maybe more😇. Miracle of compounding right !!
What is the goal in starting a Rs. 1000/- SIP? How many years do I plan to pay? How much am I expecting to accrue by the end? No clue. And that’s why I failed.
What is the SIP amount I should start with?
Ans. Rs. 1000/- per month ie. Rs. 12,000/- a year will take over 28 years to reach Rs. 10,00,000/- if I am lucky to get a 7% return every year.
And if I reduce it to 20 years, I can get my million with Rs. 12,000/- a year, if I get 13% return every year.
Even 20 years seem long, can you commit for that long? Else raise the monthly outflow to Rs. 5000/- pm or Rs. 60,000/- per year and by magic you can receive your first million in under 12 years at 7%.
There are SIP calculators on the net that help with the figures.
Rule #2: SIP to reach the yearly targets
Next I can make a simple table and see how much I should have accrued at the end of each year, so that I remain on track. Now that’s a plan.
In equities, you can have good years and bad ones and hence the only thing guaranteed is that you will not make a constant return of 7% or 13% year after year. To ride out this volatility, you can increase your SIP amount 20% every year and see that you make up for the shortfall and stay on track.
The saying “Set it and Forget it” does not work with equities, you need to spend a little time and attention to make sure your money tree is growing.
Rule #3: SIP in funds with least cost
This ensures that more of your money gets invested and works for you rather than paying the expenses of the fund. And here is where index funds come in. Actively managed funds are definitely more popular but they are also more expensive. The higher expense promise you a better return or alpha, but not guaranteed. Index funds on the other hand offer you market returns or beta – guaranteed. It is not possible to generate alpha every year for 20 years, few years maybe, but you are charged the same for all the years.
Rule #4: SIP electronically on pay day
I remember the mortgage companies asking for salary dates and they advice you to select an EMI auto debit date close to the pay day, so that there is always sufficient funds in the account. Same with SIP, portion way the money as soon as the pay check comes in and not from leftovers – pay yourself first, the wise man said😀
Hope it helps.
“Empty pockets never held anyone back. Only empty heads and empty hearts can do that.” Norman Vincent Peale