A lot of us perceive saving as a financial burden. When someone asks us to save more, we incline to groan silently. “I am barely surviving to save what I am saving right now, how am I supposed to save more?!!”.
Systematic Investment Plan, also known as SIP, is an excellent approach for your long-term or even short-term financial goals.
Let’s try to understand why aiming to increase your SIP each year is not just a good thing but an essential thing.
What is SIP?
A SIP is a route to invest in mutual funds. Under SIP investments, investors invest a fixed amount regularly in their desired mutual funds at predefined intervals for a given period. The investment amount, periodicity of the investments, and the investment duration is determined by the investor beforehand.
When we say SIP, it generally means the conventional SIPs with constant investment amount. When we calculate the SIP investment amount required to reach a specific goal using an SIP calculator, the SIP value is usually very high that can trigger affordability issues amongst most investors. So what should you do? Enter step-up SIP or top-up SIP, where an investor invests in SIP with a lower investment amount, and gradually increases it every year. There are 2 ways of stepping-up your SIP:
You can increase your SIP on a fixed rupee basis every year. For example, you can start an SIP of Rs4000 each month and then step up by Rs1000 each year. So moving forward, the monthly SIP contribution would Rs5000, Rs6000, Rs7000, …etc.
You can also increase your SIP on a percentage basis each year. For example, you can start a monthly SIP of R4000 and then step-up by 10% each year. So moving forward, the SIP contribution would be Rs4400, Rs4840, Rs5320..etc.
The magic of a 15% increase
Are you wondering how much of a difference would saving more and eventually investing more would make? Let’s consider the following table:
|SIP amount||Percentage increase||Value in 10 years||Value in 15 years|
|5000||0%||11.2 lakhs||23.8 lakhs|
|5000||5%||13.5 lakhs||31 lakhs|
|5000||10%||19 lakhs||47.5 lakhs|
|5000||15%||20 lakhs||56.7 lakhs|
The above example assumes that you have invested in equity funds with an annualised returns of 12% p.a.
Increasing your SIP amount by even 5% can have a vivid effect on your final amount. A 10% increase means achieving Rs8 lakhs more considering 10 years as the time frame. Interestingly, an increase of 15% can result in the corpus to grow almost three times bigger.
Note that, if you consider inflation, the amounts will be lower than the figures reflected.
Lastly, remember that even a 5% increase means saving up around 20% more. In the case of investing, something is indeed better than nothing at all. Happy investing!