Why Increasing SIP Allocation at a Regular Interval is Important

The introduction of SIPs has been the turning point for the mutual fund sector, and as well as for the investors, as it allowed them to migrate from traditional saving plans to super-efficient mutual funds for wealth creation. SIPs superiority over lumpsum investments and other traditional saving plans is well proven and continues to attract millions of investors.

We already know the benefits of SIPs, how it helps to limit risk, facilitate wealth creation and imbibe the culture of disciplined investing. And, if invested wisely through SIPs, it can create magic on your portfolio returns, almost doubling your corpus with minor adjustments.

One such practice is increasing the SIP amount, which is known as Step-up SIP at a regular interval. This practice of ensures, the value of your monthly SIP investment never decrease due to inflationary factor and also lets you know whether your investment plans are on track.

How to Step-Up SIP?

Most of our salaries get a hike every year, which means we can afford to put extra money in our SIP investments every year. This ensures a proportionate increase in investment corpus with respect to the rising income level.

With almost all mutual fund houses offer the Step-Up facility, that allows you to increase the SIP amount by a fixed amount or by a certain percentage. For example, you can give instructions to the fund house to increase the SIP amount every year by Rs 500 or 10 per cent each year.

Now, we will see the effect of Step-Up SIP functionality on your investments and how much the corpus amount differs from constant SIP.

Step-Up SIP

Monthly InvestmentRs 5,000
Investment Tenure20 Yrs
Expected Rate of Return12%

Case 1: Increase of Rs 500 in SIP amount every year

The investment worth at the end of tenure will be Rs 79,24,820 from a total investment of Rs 23,40,000.

Case 2: Increase of 10 per cent in SIP amount every year

The investment worth at the end of tenure will be Rs 99,44,358 from a total investment of Rs 34,36,500.

Constant SIP

In constant SIP, without any increase in SIP amount for the rest of the tenure, the worth of your investment will be Rs 49,95,740 from a total investment of Rs 12,00,000.

If we compare it with Case 1, Step-up SIP plan generates an extra return of Rs 17,89,080 from the additional investment of Rs 11,40,000 over the twenty-year period.

And, in Case 2, it translates to an extra return of close of Rs 50 lakh from the additional investment of Rs 23 lakh. This is almost 100 per cent additional return. Small changes can have a massive impact on long term investments.

Conclusion

Increasing SIP amount is certainly a wise decision, as it will keep you aligned to the evolving market dynamics and requirements over the long term period. You should select the Step-up SIP amount (a fixed increase or a percentage increase every year) carefully because, beyond a point, it becomes difficult to service SIPs at a higher amount.

For example, A fixed yearly increase in SIP amount of Rs 500, would translate in monthly SIP instalment of Rs 14,500 at the 20th year. Whereas a 10 per cent annual increase, would translate in monthly SIP instalment of Rs 33,637 in the 20th year, which is too high, and affordability comes to question. Also, it is not advisable to have such a large SIP in a single scheme, as risk exposure increases.

You can also instruct the mutual fund house, to stop the step-up facility once it hits the upper ceiling or your comfort level, and continue investing the same SIP amount rest of the period.

Increasing SIP amount at a regular interval ensures you attain all your financial long term goals at a much faster pace and easily.

One thought on “Why Increasing SIP Allocation at a Regular Interval is Important

  • July 5, 2019 at 9:45 PM
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    Great article,keep it up

    Reply

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