Mutual funds are quite popular among investors these days due to their better returns. However, the profit received in this depends on the fluctuations of the stock market. Mutual funds can be easily invested in through SIP (Systematic Investment Plan). If you are also thinking of investing in SIP recently or are worried after investing about how much to invest and for how long, then the formula of 12+12+20 can prove to be very useful for you. Let’s know what this magical formula is.
The secret of 12+12+20
This 12+12+20 formula can solve all your confusion related to SIP investment in a jiffy. It is a simple but powerful strategy that helps you understand how much of your income you should invest and for how long you should stay invested so that you can get a good return.
Invest 12% of your income
The first part of this formula says that you should set aside at least 12% of your monthly income for investment. By doing this, you will not only get better returns, but this investment amount will also not affect your savings and emergency fund. That is to say, you can easily invest while meeting your needs.
Furthermore, the minimum expected return in a mutual fund SIP is considered to be 12 percent. However, this return depends on the market movement, so it can be more or less. Therefore, it is important to diversify your investment portfolio across different types of funds to reduce the risk.
Expect an average return of 12%
The second ’12’ here means that an average annual return of 12% can be expected from a mutual fund SIP. This is a general estimate, and as mentioned earlier, it may change according to market conditions. Some years may give you more returns than this, while some years may give you a little less. But in the long term, an average return of 12% is considered a good target.
Invest for 20 years
The most important part of this formula is ’20’. This means that you have to invest in a mutual fund SIP for at least 20 years. The longer you stay invested in mutual funds, the more you will benefit from compound interest. Compound interest is the magic that helps even your small savings to form a large corpus. Long-term investment also protects you from minor market fluctuations.
How does this formula work
Suppose a person earns ₹35,000 every month. At the rate of 12%, he has to invest ₹4,200 every month in SIP. Now, if he gets an average annual return of 12%, he will get around ₹38,63,401 on maturity after 20 years. This is a great example of how regular and disciplined investing can create a large corpus in the long term.
However, it is important to note that the profits from mutual funds also come with several charges, including agent fees and taxes. So, invest only after looking at these charges carefully. Always remember that it is very important to assess your risk appetite and financial goals while investing.