The sensex fell well below 60,000, which gave many investors the opportunity to re-enter the markets. This downtrend came amid a strong market rally of 16% since June this year, shifting the focus back to stepping up investment in equities and equity-backed instruments.
As the market rallied last month, raising hopes and optimism among market investors, fund companies expected increased investment in Systematic Investment Plans (SIPs), bringing assets under management (AUM) at an unprecedented level. Many investments have also invested in lump sums to take advantage of the benefits of the greatly strengthened market.
However, not all can invest at once, prompting many investors to step up their SIP investments. In a progressive SIP, investors can gradually increase the amount they put into funds through SIPs at periodic intervals, allowing them to invest more impartially to market conditions.
Increase investments over time
There’s a lot at stake if you put your earnings into a lump sum, which means increasing your SIPs at regular intervals helps you invest more without hurting your finances.
B Padmanabhan, Founder, Wealth investment services says, “The beauty of the Progressive SIP or Complementary SIP concept is to give a slight nudge to increase the investor’s SIP every year because most of them would get a raise in their salary every year. Since it is automatically set when SIPs are started, investors do not feel the burden either. Typically, this will only be 10% each year. For example, if the first-year SIP is ₹10,000, then the next year’s SIP would be ₹11000. Next year it would be ₹12,100 and so on.”
“Investors start with small amounts of SIP; over a longer period, their amounts of SIP will steadily increase. The cumulative effect will be massive, thus leading to the accumulation of a huge amount of corpus. This increase in value of the SIP once a year is reminded to the investors a month before so that they can act accordingly.Based on the increase in their salary increases, they can increase by 10%, 15% or 20% as well. This is a simple and straightforward strategy and one can achieve their long-term goals slowly and steadily, he added.
The following illustration will help to understand the importance of incremental SIP investments in a larger context, especially when made over an extended period.
It’s no surprise that SIP investments need to be planned just like other personal finance decisions. Gradually increasing investments allows you to earn more while continuing to manage your finances. One solution is to increase your investments as your income increases.
Rahul Agarwal, owner, financial advent says: “Step-up or Top-up is a facility available for SIP mode investments where the investor can specify an amount or percentage by which the regular SIP installment amount is to be increased at predefined intervals, for example, semi-annually or annually. This simple strategy can accelerate the wealth-building journey for investors and provide financial discipline since steadily increasing savings can help investors keep pace with inflation.”
“From my perspective and experience, I have found that an annual increase (increase) in the amount of SIP works well for most people, as it is common to review personal finances once a year For salaried people, treks are also usually done once a year, so I think a yearly frequency is optimal,” Agarwal added.
Below is a simple illustration to elucidate the same.
Suppose you have a SIP investment of ₹5000 each month in a mutual fund with a rate of return of 11% each year. You now decide to increase your SIP investments by 10% each year for the next 15 years. The calculations in the next sheet highlight the difference in the final corpus gained.
The idea behind the frequent increase in investments is to optimize mutual fund returns from a long-term perspective. This explains why many people add a new SIP or increase the amount of the SIP at regular intervals.
Decide on investment increases
Automating investments is indeed the best possible way to stay invested without worrying about market movements or forgetting to continue investing. Increasing your SIPs helps you reach your investment goals faster. In addition, it has an improving effect on the amount of corpus, which is necessary to fight inflation in the long term. However, scaling up SIPs should not be a random decision.
Dev Ashish, Founder, Stable investor says, “How much to raise depends on many factors like increased income, increased expenses, short-term goals that require funding, outstanding loans that you may want to prepay, etc. But ideally , you should try to increase or increase your investments by a rate at least equal to the growth rate of your income If you can control your expenses and not allow them to grow as quickly as your income (via the drift of the lifestyle), you can even increase your investments at higher rates. But if you can’t manage either, then something is always better than nothing. So increase as much as you can. Even five percent, it’s better than not increasing at all, and the benefits add up.
Ashish explains the effect of the raise, citing the following example: “Let’s say you want to do a ₹25,000 monthly SIPs. Now, if you keep the amount constant, after 15 years you will have approximately ₹1.05 Cr if you generate average returns of 10%. But if you were to increase your SIP by a mere five percent each year, then your corpus would be almost ₹1.38 cr. You increase your final corpus by more than 30% and that too by simply increasing the investment by 5% each year. »
Ashish also advises his investors to look at this through the lens of the lens. Suppose you need to accumulate ₹3 million dollars in 20 years. Assuming you are earning around 11% average returns, then you have three options:
- you invest ₹39 to 40,000 constant SIPs for 20 years, or
- You start with ₹27 to 28,000, then increase the SIP by 5% each year, or
- You start with ₹18-19,000, then increase the SIP by 10% every year.
So the option to step up the SIP can also work for those who don’t have a big surplus to start with. They can start small and then, every year or two, increase the SIP by 5-10%. Indeed, SIP makes it possible to automate both savings and investments while supporting market uncertainties. It also helps them to profit from the average investment in rupees. Increasing your SIP investments not only increases your investments, but allows you to save and invest more in a disciplined manner based on your current income and future financial needs.
Pratibha Girish, Founder, Finwise Personal Finance Solutions says, “Your income increases every year. Your investments should therefore reflect the percentage increase in income. This can have a magical effect on the corpus you accumulate. The icing on the cake is that it ensures that you do not increase your expenses unnecessarily.
Financial goals matter
It feels so good to be able to reach your financial goals; even more so if you reach them earlier than expected. However, you may not have excess funds to invest all at once early in your career. You can therefore start a SIP with a lower contribution which you can accelerate with an increase in your income to meet your various financial objectives. Much depends on how long you need to continue with your SIPs or how much you need to intensify your SIPs. If you want to achieve a higher corpus early, you can increase your SIPs significantly early in life, although the time investment is significant. However, if you are ready to continue investing over the next 10-15 years, you may want to consider slowly increasing your investments.
If you have massive financial goals, you should consider investing through SIPs over a long period of time depending on how much corpus you are looking at and after how many years.
Viral Bhatt, Founder, money mantra says, “More often than not, people are hesitant to invest, let alone increase their SIP contributions – especially those who lack financial discipline. The main attraction of SIP is convenience. You can automate payments on your pay day. You can safely assume that your income would increase by 10% and opt for a progressive amount of at least 5-7%. With every annual bonus, raise or increment, add to your SIP – the power of compounding is at play here and it will reap higher returns. Additionally, investing in mutual funds via SIP over an extended period of time makes market timing irrelevant.
Regular income matters
For those with access to regular, ongoing income, SIP investments can be easy and an easy feature to add to your portfolio. However, many people opt for freelancing and other gigs, thus causing them to receive sporadic income, which prevents them from continuing their SIP investments. They can opt for the “SIP Pause” option or choose to invest in installments, with each subsequent investment being greater than the previous ones made.
In case investors start earning again, they can renew their SIP investments depending on the synchronization of funds with their financial goals. SIP scaling up doesn’t have to be a lifelong affair. As with other investment options, you should frequently review your investments and re-roll them, if deemed appropriate. The idea is to stay disciplined with your investments instead of adopting a haphazard attitude towards them.
The CAGR shows returns smoothed over a number of years.