How to plan the tenure for your SIP?

5 MinsDecember 09, 2019

Investing in mutual funds can become both easy and convenient thanks to Systematic Investment Plans (SIPs). SIPs infuse the habit of investing regularly and you don’t need to time the market to generate wealth.
That being said, how long should you continue your SIPs?

tenure for sip

To accomplish your financial goals, it is important to align them with your SIP tenure and choose the appropriate category of mutual funds. Every financial goal, such as, buying a home, children’s education/wedding, your retirement plans, etc. is unique and has different time horizons. Once you are clear about what your goals are and the time for their realisation, you can decide how long your SIP in a particular mutual fund should be. Let us look at three major life goals and see how to plan your SIP for each of them.

[Also Read: What is Systematic Investment Plan (SIP)?]

Your child’s higher education:

The factors you need to consider include:

- The current age of your child
- The number of years you have before your child enters college for higher studies.
- The area in which he/she wishes to specialise whereby you can estimate the money you need to save and commit to a SIP
- Your financial health as a parent and that of the family (income & expenses, assets & liabilities, etc).
- Whether you are adequately insured (because the biggest potential setback to a child's future is the demise of the breadwinner)

Based on the above factors, determine the level of risk you can afford to take. Many a times, parents adopt a risk-averse approach to meet their child’s future. But that may not be a prudent way considering the rate at which inflation in education is galloping, particularly higher education.

Once you have considered the above factors, you can estimate the future value of higher education cost accounting for 10-12% education inflation (on a conservative side) and compute the SIP amount you need to commit in today’s terms in suitable and worthy mutual fund schemes.

Your child’s wedding expenses:

The factors you need to consider include:

- Your child’s current age and the number of years to go before he/she ties the knot
- Your child's point of view on his/her marriage expenses. For instance, your child may not want a grand wedding that involves spending loads of money
- Likely wedding expenses
- Health and life insurance for yourself as the breadwinner of the family
- Your financial health as a parent and of the family (income & expenses, assets & liabilities, etc) to determine your risk appetite

Based on the amount you would spend on your child’s wedding expenses in today’s terms, extrapolate the future value taking into account 8-10% inflation plus add some margin for an unexpected increase in related expenses, compute the SIP amount, and then choose the suitable mutual fund schemes.

Your retirement

The points to consider while deciding the SIP tenure include:

- Your current age and the number of years you have before you hang up your boots
- Your life expectancy (an estimate, based on your family’s medical history)
- Your current basic monthly expenditure and the future value of these expenses when you retire
- Your existing Emergency fund
- Your life insurance and health insurance coverage
- Your assets and liabilities
- Whether certain assets can generate cash-flows during retirement
- And what you wish to do after retirement

Based on the above, you will be able to…

✓ Estimate the retirement corpus you need to live a comfortable retirement,
✓ The risk you can afford to take,
✓ Compute the SIP amount, and
✓ Choose suitable mutual fund schemes

Following the above exercise for each financial goal will help you set the asset allocation right, and pick appropriate types of mutual funds for the portfolio.

Asset Allocation based as per ‘Years to Goal’

Time Horizon for SIPsEquity FundDebt FundGold Fund
More than 10 years90%0%10%
5-10 years70-80%10-20%10%
0-5 years10-40%55-85%5%

For achieving any goal it is important to stay invested even during volatile market conditions and do review the performance of your mutual fund schemes regularly. This will help you stay on track to achieving your goal.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply