How a Rs 15,000 monthly SIP can be split 5-5-5 to plan for Rs 1 crore and other goals

Calculations showing how a monthly mutual fund SIP can build a corpus of crores are common. In one example, a monthly SIP of Rs 15,000 earning an estimated 15 per cent annual return over about 16 years could grow to more than Rs 1 crore.

On paper or in an SIP calculator, the arithmetic looks easy and attractive. In real life, however, the question is not only how many times the money will multiply. The real question is whether an investor can keep investing for so many years without a gap and without withdrawing money midway.

Finance influencer Garima has explained this practical side of SIPs in a video. According to her, looking only at returns and time is not enough when calculating an SIP. Life has many turns when money may suddenly have to be withdrawn from investments.

Suppose a person starts a monthly SIP of Rs 15,000 at the age of 25. If the person earns an average return of 15 per cent a year and keeps investing for 16 years, the total corpus can easily exceed Rs 1 crore. Going by the calculator's figures, the target of Rs 1 crore looks very easy. But after 25, several big family and financial expenses come up.

If an SIP started at 25 is to run for the next 16 to 20 years, major milestones such as marriage, buying a home and, later, children's education will come in that time. The investor may not be able to keep up the full Rs 15,000 SIP every month. A big need may also force the person to withdraw some money. Putting everything into a single SIP and waiting for one big goal may therefore not be the right strategy.

According to Garima, the monthly Rs 15,000 SIP should be divided according to different needs and goals. This is the 5-5-5 formula.

The first Rs 5,000 is for a long-term goal. This money should go towards a distant and important aim such as retirement. If it is left to run uninterrupted for a long time, it helps build a large corpus of crores.

The second Rs 5,000 is for a medium-term goal. This money should be set aside for other major responsibilities, which could include buying a home, arranging for children's education or other big family expenses.

The remaining Rs 5,000 is for a short-term goal. This amount should be used for needs in the near term, such as buying a new vehicle or a sudden large expense expected in the next few years.

When investing through an SIP, the most important thing is not how many years it will take to reach Rs 1 crore. It is more important to identify the big and small expenses that will come up in that period. Before starting any SIP, it is therefore essential to outline one's different financial goals.

It should also be remembered that returns from an SIP are never fixed. The 15 per cent return used in this calculation is only a hypothetical reference. The actual return depends entirely on the performance and ups and downs of the stock market.