In finance there’re many thumb rules, like the Rule of 135, Rule of 72, 50/30/20 rule, etc. Let’s learn one more rule which we can implement in our investing journey.
In personal finance, we saw if there’s more income and less expense, we’ll save money which we’ll invest later.
Here the 10% thumb rule can be implemented. For e.g. you choose a Mutual Fund SIP and your income is ₹30,000/month. Assume that only ₹27,000 comes in your bank A/c and rest goes in SIP.
Here we need to step up the SIP (as salary increases) with a minimum of 10%, now look at it’s magic.
If you search on Google ‘step up SIP calculator’ you’ll see many options, we’ll select the 1st option. Monthly investment is ₹3,000 as our salary is ₹30,000. Annual step up is of 10%, expected ROI is 15% (if I invest in equity oriented assets), time period you can take of 10 years.
Invested amount: ₹5,17,000
Expected returns: ₹6,13,000
Total value: ₹11,87,000 (almost double)
This is the magic where you’re gradually violating your returns through SIP step-up. Mutual Funds can be redeemed anytime, within 3-4 days the money will be reflected in your A/c. If you want to control this mutual funds, you can invest in ELSS funds which locks your money for 3 years (tax benefit under section 80C)
Another Example:
Calculation:
1. Without Step-up:
Total Invested Amount (30 years * 12 months/year * ₹5,000/month) = ₹18,00,000
Use an SIP calculator to find the Maturity Amount at 12% annual return for 30 years. (Estimated Maturity Amount: ₹1,38,95,473)
2. With Step-up (7% annual increase):
Use an SIP calculator with a step-up option.
Enter the initial investment amount (₹5,000), annual increase (7%), and other details mentioned above. (Estimated Maturity Amount with Step-up: Over ₹2 Crore)
Key Points:
This is a simplified example. Actual returns may vary depending on market performance.
Starting early allows you to benefit from compounding over a longer period.
A step-up SIP helps you increase your investment amount gradually, aligning with potential salary growth.
Adjust the SIP amount and expected return based on your risk tolerance and financial goals.
Additional Considerations for Gen Z Investors:
Focus on Long-term: Gen Z has a longer investment horizon, allowing them to invest in riskier assets like equity Mutual Funds for potentially higher returns.
Start Small: Begin with a comfortable SIP amount and increase it gradually as your income grows.
Research & Diversify: GenZ can easily compare different mutual funds and may consult with an advisor to create a suitable financial plan
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