Why step up or step down SIP amount calculator by valuation needed?
Step up or step down SIP amount calculator calculates the investment amount according to their valuation with a regular SIP amount if market in a median valuation.
Generally investor investing money in equity, mutual funds, ETF which is volatile asset, in a regular interval like as monthly, bimonthly, quarterly etc. but for extra rate of return over our investment, we have to invest by valuation. Suppose market in a low valuation then investor invest more money like that if market in a high valuation then investor invest less money.
But how we will know that market in a low valuation or in a high valuation. For this we will use 3-years or more historical median data of any valuation ratio like as PE ratio, PBV, Mcap/sales ratio etc which is best for us.
Example of step up or step down SIP amount calculator by valuation:
Calculation methodology:
Formula of step up or step down SIP amount calculator by valuation:
Regular SIP amount in any stock or fund= a
Fund earnings CAGR for atleast 3year or more time period in %= g
Median PE of fund or stocks for 3year or more time period= m
Current PE of Fund or stocks= c
PE range for same regular SIP amount:
Assumption: “one fourth of funds earnings or price growth atleast 3years or more time period”
Upper PE range= m + m×g/400
Lower PE range= m – m×g/400
Current PE up or down from median PE, rf= (c – m)×100/m
Note-If result will come with negative sign means current PE down from median PE
Conditions:
Condition 1: When current PE is less than lower PE range:
lower PE > current PE
Step up SIP amount, su= (a×rf×rf)/(g×g)
Total SIP amount with step up= a + su
Condition 2: When current PE is greater than upper PE range:
current PE > upper PE
Step down SIP amount, sd= Minimum{a , (a×rf×rf)/(g×g)}
Total SIP amount without step down= a – sd
Condition 3: When current PE in between or equal to lower and upper PE range:
lower PE =< current PE <= upper PE
Total SIP amount within or equal to lower and upper PE range= a
Derivation and assumption of formula for step up or Step down SIP amount calculator by valuation:
The price of any fund or stock does not move in the mid-line continuously, some times the price remains above the mid-line and some times below it. When the price is below the mid-line, it is an opportunity and when it is above it one should be cautious.When the price of fund or stock goes below the mid line and comes back to the mid line then a triangle is formed. The area of triangle is the step up and step down coefficient which is called step up and step down amount after multiplication in regular SIP.
Step up or step down SIP amount= regular SIP amount×triangle area
Triangle area= 0.5×base×perpendicular
Perpendicular= fall or rise from mid level/fund earning CAGR
Base= 2×fall or rise from mid level/fund earning CAGR
Triangle area= 0.5×2×(fall or rise from mid level/fund earning CAGR)^2
Triangle area= (fall or rise from mid level/fund earning CAGR)^2
Step up or step down SIP amount= regular SIP amount×(fall or rise from mid level/fund earning CAGR)^2
Short description for terminology used in step up or step down SIP amount calculator by valuation:
What is SIP?
SIP is also known as Systematic Investment Plan. SIP is usually done in Mutual Fund scheme, Equity Stocks, and ETF etc. SIP is a regular Systematic Investment Plan, which is done monthly or quarterly in any mutual fund scheme or equity stocks in a specific date. SIP has many benefits. Like SIP finds out the Rupee Cost Averaging. We can collect a good amount of corpus through small investment of amount in SIP in a long period.
What is PE?
PE stands for price to Earnings (P/E) ratio. The price to Earnings ratio is a financial metric of company valuation. It’s describe that per share 1 rupee of Earnings how much we are paying price per share.
Formula:
PE ratio = current stock or fund price per share / current Earnings per share
current PE ratio calculates any equity or fund with last Market price divided by Earnings per share.
Median PE ratio:
☆ Get the PE ratio values over a specific time frame (e.g., last 5 years, monthly or weekly data).
☆ Sort the PE values in ascending order.
☆ If odd number of values then,
Median PE = Middle Value
☆ If sum number of values then,
Median PE = Sum of middle Two Values/2
☆Example:
PE values over 7 years
(25, 18, 22, 21, 23, 15, 30)
Sort in ascending order
(15, 18, 21, 22, 23, 25, 30)
Since there are 7 values (odd)
Median PE = 22
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It is a metric that calculates the average annual growth rate of an investment over a specific period, taking into account the effect of compounding interest.
Formula:
CAGR in % = (Final Value / Starting Value)^(1 / Number of Years) – 1
Suppose Rs 1 is invested in a stock or fund 5 years ago and today its value is Rs 2 then the CAGR will be 14.87% for a 5 year time period.
CAGR calculator
What is equity stock?
Equity stocks are also called shares or equity. A person holding shares of a company is called a shareholder and a partial owner of the company. He is entitled to a percentage of the company’s profit or loss equal to the percentage of equity shares he holds.
What is mutual fund?
The assets used to create a mutual fund are equity stocks, commodities, bonds, or some other securities. A diversified portfolio or basket created by combining more than one security or any security more than one sub securities is called a mutual fund. Money of many investors is invested in it which is managed by the fund managers of the fund house. Some mutual funds types are written below-
☆ Equity mutual funds
☆ Debt mutual funds
☆ Hybrid mutual funds
☆ Index mutual funds
What is ETF?
An ETF is an exchange traded fund. These are created like mutual funds and trade on exchanges like equity stocks. These are created from assets like equity stocks, commodities, bonds etc.
What is PBV?
PBV stands for Price-to-Book Value ratio. It’s a financial metric that compares a company’s current market price to its book value (net assets).
Formula:
PBV ratio = Market price per share / Book value per share
What is the regular SIP amount one should take?
If our salary is 15000 then we should take at least 1/3rd of our salary as per our saving goal. If this much is not possible then you can save as per your requirement. Now invest half of this remaining part in fund or stocks and invest the other part in fixed deposit. Now wait for the market to fall and when it falls then use the step up calculator to break the fixed deposit and invest in fund or stocks.
Where can I easily find the median PE and current PE data?
You can get the data of the fund or stock in which you invest from the investing app or you can easily find it by searching on Google. If you do not get the data of any fund, you can get the data of the tracking index of that fund. If you do not get this also, you can use the data of Nifty 50 index, but this should be only for the fund and not for any particular stock.