A systematic investment plan (SIP) is a mode of investment through which you can put a certain amount in a chosen mutual fund at a suitable regular interval (yearly, half-yearly, quarterly, monthly, or weekly). This helps build a disciplined approach towards investing for a long-term financial goal. But have you ever thought of increasing your SIP periodically? Here is why and how you can step up your SIP annually.
Why Should You Increase Your SIP Investment Every Year?
More investment means more gains! A SIP plan best works that way. Say you wish to invest ₹5,000 monthly for 15 years through SIP in an equity mutual fund from which nearly 12% returns are expected. In that case, after 15 years, you will have generated a corpus of around ₹26,00,000. If you top up the SIP amount by 5% annually, your corpus at the end of the investment horizon will be about ₹32,00,000. Thus, your monthly SIP will go up by ₹250, ₹262 and ₹275 in the second, third and fourth years, respectively and will keep increasing like that. As you slowly increase the amount each year, your budget will barely be stressed.
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Here are the two main reasons for increasing your SIP installment:
Counter Inflation Better
Between 1960 and 2021, the average annual rate of inflation in India was 7.5%. The cost of an item, for instance, rose from ₹100 in 1960 to more than ₹7,800 at the start of 2022. The YoY rate of inflation for November 2022 was 5.4%. Prices are bound to increase further as the following inflation rates are projected over the next 5 years:
- 2023— 5.14%
- 2024— 4.36%
- 2025— 4.13%
- 2026— 3.99%
- 2027— 4%
Inflation reduces the purchasing power of your hard-earned money. The amount that seems enough to meet a goal today might not be so a few years from now. So, besides choosing the best SIP plan, consider stepping it up yearly to enjoy inflation-adjusted returns.
Build a Larger Corpus
Adding to your SIP investment can boost the effect of compounding. Because you invest a higher amount each year, the expected returns will also be higher. This might help you achieve your goal earlier than expected since you can save more significantly over a shorter duration.
How to Step Up Your SIP?
You can step up your SIP in one of the following ways:
On a Fixed Rupee Basis Every Year
If you invest ₹10,000 monthly in a mutual fund via SIP, you can increase it annually by ₹1,000-₹2,000 based on your needs.
On a Fixed Percentage Basis Every Year
In this method, you can top up your monthly SIP by 10% to 20% year after year.
Conclusion
If you wish to automate the step-up SIP investment, consider requesting the fund house to allow that. Then you need not top up the installments manually and, thus, can save time and effort.
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