When it comes to investing in equity market, it is often said that the best approach is through Systematic Investment Plan abbreviated as SIP. This feature allows an investor to invest a pre-decided sum in a fund of one’s choice on a monthly basis. Since this is an automated procedure, this takes away the hassle of remembering to invest every month. What often happens is that once a SIP amount is set, investors tend to stick to it throughout its tenure and never revise the amount in line with the rise in one’s income.
As your income rises, your savings too should go up. Ideally, for a salaried person, the investment amount should increase every year in line with the increase in your income. To explain, if you get a 25% salary hike in a particular year, you should ideally divert a higher portion of the increment towards saving i.e. SIP investments. This ensures that over long term you can meet your financial goals comfortably without having to invest large sums. For example, if you require a corpus of Rs 25 lakh after 10 years, assuming 12% return, you would need to invest Rs 11,000. At the same time, if you increase the contribution by 10% each year, you would only need to invest Rs 8,000 in the first year.
While step-up SIP may not look like a game changer, the reality is that it can have a dramatic effect on your long-term savings. Suppose you are saving for long term goal like retirement, a10% increase in SIP amount every year over a decade plus has the potential to generate a 45% bigger nest egg. This is why Provident Fund, which links monthly contribution to basic salary of the member is such an effective tool for retirement savings.
There are several others benefits of step-up approach. One, you reach your goal faster if the target amount is fixed. Other than this, incremental rise will prevent you from splurging away your hard earned money as your income increases.
The biggest benefit of using the SIP mechanism to invest in mutual funds is that it provides you complete freedom and convenience to invest as per your own comfort. At the same time, it helps you to inculcate financial discipline. Through SIP an investor need not worry about volatility associated with equity investing. While at times it may appear risky, the important point is that over time you would have invested across the low and high points of the market, thereby benefiting from rupee-cost averaging which would have taken place over time. Last but the strongest point is that investing steadily over long term aids in experiencing the benefits of the power of compounding. In the initial few years, your portfolio may not show the impact of compounding but on a five year plus horizon, a patient investor can enjoy the benefits of compounding.
How to Increase SIP Amount?
Often when it comes to increasing SIP amount, investors tend to open a new SIP rather than increasing the amount of an existing SIP. Also, many investors tend to choose a different fund for each of their goals. Suppose you have six goals to be achieved, the common approach is to invest in six different schemes via SIP. This need not be the case. An investor can choose three to four different say equity scheme with robust long term performance track record and invest into these for their many goals. It is better to invest in a limited numbers of funds, instead of dealing with several funds at the same time.
To conclude, step-up SIP is a boon for investors who do not have very high income. Many a times investors get intimidated by the huge savings amount required for certain goals like buying a house or retirement. Instead of losing heart, an investor should start saving small amounts and then scale up as income goes up. A step-up approach can be used to gradually move towards the desired goal with whatever savings is possible at a certain point in time. It takes away - will wait till I have that particular amount to start investing - out of the picture which is a very powerful move.