Many parents dream of giving their children a financially secure future. One of the simplest ways to achieve this goal is through a Systematic Investment Plan (SIP) in mutual funds. While SIPs are widely used for long-term wealth building, a specific formula, the 21x10x12 formula, can help turn a consistent investment into a million-dollar fund for your child. Despite the popularity of SIPs, many people in India aren’t familiar with this approach. Here’s a breakdown of the 21x10x12 formula and how it can help your child become financially independent in the future.
What Is SIP?
SIP, or Systematic Investment Plan, is a method of investing a fixed amount in mutual funds at regular intervals, generally monthly. With SIPs, investors benefit from compounding returns, which means that the interest they earn over time generates further earnings. This simple yet powerful strategy allows you to build significant wealth by making regular investments over time.
In SIPs, investors’ funds are handled by a professional asset management company (AMC). These companies pool your investment with others and invest in stocks, bonds, and other financial assets. SIPs often provide better returns than traditional savings accounts or fixed deposits due to the potential of the stock market and compounding.
What Is a Mutual Fund?
Mutual funds pool money from multiple investors and invest in a variety of securities like stocks, bonds, and money market instruments. These funds are managed by professional portfolio managers who decide on which stocks or bonds to invest in to maximize returns. By investing in a mutual fund, investors gain access to a diversified portfolio, reducing individual risks while sharing the potential gains or losses with other investors.
How Does the 21x10x12 SIP Formula Work?
The 21x10x12 formula is a straightforward plan that aims to help parents build a ₹1 crore corpus for their children through SIPs. Here’s how it works:
- 21: Invest for a period of 21 years.
- 10: Deposit ₹10,000 monthly into a SIP account.
- 12: Assumes a 12% annual return on investment through compounding.
By investing ₹10,000 each month for 21 years with a 12% average annual return, you can accumulate around ₹1 crore for your child by the end of the investment period.
The Step-by-Step 21x10x12 Formula Calculation
If you invest ₹10,000 per month in a SIP account with an expected return rate of 12%, here’s how it breaks down:
- Monthly Contribution: You invest ₹10,000 every month in your child’s SIP.
- Investment Period: For 21 years, consistently invest the same amount every month.
- Interest Rate: The average annual return is expected to be around 12%, with compounding adding value to your investment.
Let’s calculate the potential fund after 21 years:
- Total Investment Over 21 Years: ₹10,000 x 12 months x 21 years = ₹25.2 lakh.
- Interest Earned: With compounding, the interest over 21 years at 12% amounts to approximately ₹88.6 lakh.
- Total Fund Value: ₹25.2 lakh (investment) + ₹88.6 lakh (interest) = ₹1.14 crore.
This means that at the end of 21 years, you would have built a fund of approximately ₹1.14 crore for your child.
Why SIP Is Effective for Long-Term Goals Like Child’s Education
SIP investments make it easy to build wealth gradually. Here’s why SIPs are so effective for long-term goals:
- Regular Investment: SIPs encourage consistent investment, ensuring you are disciplined in saving for the future.
- Power of Compounding: As the returns compound, they generate returns on themselves, creating exponential growth over time.
- Flexibility: You can choose to increase or decrease the SIP amount based on your financial situation.
- Market-Linked Returns: Over long periods, SIPs tend to provide better returns than traditional fixed-income options, thanks to the stock market’s growth potential.
Things to Keep in Mind Before Investing in SIPs
Before starting a SIP, consider the following:
- Risk Factors: SIPs are linked to the stock market and are subject to market risks. Although mutual funds generally grow over time, they can also fluctuate in the short term.
- Consult a Financial Advisor: It’s always wise to seek advice from a certified financial advisor who can help you choose the right fund based on your goals.
- Stay Committed: Consistency is key. SIPs require long-term commitment to reach desired financial goals, so try to avoid withdrawing funds early.
Tax Benefits of SIP Investments
Investing in mutual funds through SIPs can offer certain tax benefits. Equity-Linked Savings Scheme (ELSS) funds, for example, are eligible for tax deduction under Section 80C of the Income Tax Act up to ₹1.5 lakh in a financial year. This added benefit helps maximize returns and reduce taxable income.
Final Thoughts
The 21x10x12 formula is a simple way to make sure your child’s future is secure. By following this formula, you can build a significant fund over time with disciplined monthly contributions. Investing early and consistently can make a substantial difference, setting up your child for a bright and financially stable future.
Before you start, remember to consult with a financial expert and be prepared for the long-term commitment needed to achieve these returns.
