Building wealth through a Systematic Investment Plan (SIP) is a popular way to work towards long-term financial goals. The idea is to start early, invest regularly and increase your contributions as your income grows.
Assuming that your target is to build a Rs 1 crore corpus over 20 years. With a 10% annual step-up in your SIP, you could start with as low as Rs 5,000 a month, if the average returns are 12%.
- Monthly amount: Rs 5,000
- Step Up % (annual): 10%
- Investment duration: 20 year
- Expected rate of return: 12%
- Invested amount: Rs 34,36,499
- Estimated returns: Rs 65,07,857
- Total value: Rs 99,44,357
Sounds easy. But life does not always go according to plan. A job loss, medical emergency or unexpected financial burden can force you to pause your investments. In such cases, what if you stop SIP for a year. Does it push you too far away from your goal?
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Let’s look at how a one-year pause could affect your investment journey.
Assuming that after year 8, you had to pause the SIP for a year. Corpus created during 8-year-period:
Monthly amount: Rs 5,000
Step Up % (annual): 10%
Investment duration: 8 year
Expected rate of return: 12%
Invested amount: Rs 6,86,153
Estimated returns: Rs 4,01,824
Total value: Rs 10,87,977
This corpus of Rs 10.88 lakh continues to grow for the next 12 years. Generally with SIPs, missing three consecutive missed payments terminates the plan. The option to pause investments is also usually available till six months. This means that while your existing corpus keeps growing, you will not be able to make fresh investment in the same plan after 1 year. This can impact how compounding works:
Growth of Rs 10,87,977 lump sum corpus over next 12 years
- Investment amount: Rs 10,87,977
- Investment duration: 12 year
- Expected rate of return: 12%
- Invested amount: Rs 10,87,977
- Estimated returns: Rs 31,50,755
- Total value: Rs 42,38,732
This means that your existing corpus grows to Rs 42,38,732 over the next 12 years, assuming consistent returns. This means that the remaining Rs 58 lakh corpus will need to be built once you resume your SIP journey again:
Starting with Rs 5,000 at 10%, your SIP contribution at year 8 grows to Rs 9,744 per month. After a year’s break, you have 11 years remaining for investment target:
If you start your SIP where you left – with Rs 10,000 per month, you will reach the target of Rs 58 lakh in 13 years, which means your overall investment period gets pushed from 20 to 22 years. But if you want to reach your goal within 20 years as planned, you now only have 11 years to reach the target:
- Monthly amount needed: Rs 14,000
- Step Up % (annual): 10%
- Investment duration: 11years
- Expected rate of return: 12%
- Invested amount: Rs 31,13,236
- Estimated returns: Rs 26,75,086
- Total value: Rs 57,88,322
This shows that pausing your SIP for even just 1 year can extend your investment timeline by a few years. If you resume your SIPs, trying to reach the goal within the same timeline, you may need a start with a larger value. These calculations are fairly simple and assume that returns are consistent. However, in reality, mutual fund returns are never guaranteed and market fluctuations can impact your returns. It is best to consult with an expert before making a significant financial commitment to avoid any stress later.
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