The sensex has tanked well below 60,000 giving many investors the opportunity to enter the markets again. This bearish trend came amidst a sharp rally in the market by 16 per cent since June this year, thus, putting the focus back on stepping up investments in equities and equity-backed instruments.
How stepping up your SIPs can help you reach your financial goals faster
As the market rallied last month springing forth hope and optimism among market investors, fund houses expected increased systematic investment plans (SIPs) investments, thus, taking the assets under management (AUM) to an unprecedented high. Many investments also invested in lump sums to avail of the earnings from the considerably strengthened market.
However, not all can invest in one go, thus, prompting many investors to step up their SIP investments. In a step-up SIP, investors can gradually increase the amount they put in funds through SIPs at periodic intervals, thus, allowing them to invest more unbiased of the market conditions.
Increasing investments with time
There is a lot at stake if you put your earnings in a lump sum, which means that increasing your SIPs at regular intervals helps you to invest more without hurting your finances.
B Padmanabhan, Founder, Fortune Investment Services says, “The beauty of the step-up SIP or Top-up SIP concept is to give a slight push to increase investor's SIP every year, as most of them would get a hike in the salary yearly. Since it is automatically set at the time of starting the SIPs, investors also don’t feel the burden. In general, it will be only 10 per cent every year. For example, if the first-year SIP is ₹10,000, then the subsequent year’s SIP would be ₹11000. Next year, it would be ₹12,100 and so on."
"Investors start with small amounts in SIPs; over a longer period, their SIP amounts will go up steadily. The compounding effect will be massive, thus, leading to the accumulation of a huge corpus amount. This increase in SIP value once a year is reminded to the investors a month before so that they can act accordingly. Based on increment in their salary increments, they can increase from 10 per cent,15 per cent or 20 per cent also. This is a simple straightforward strategy and one can reach their long-term goals slowly and steadily, he added.
The following illustration will help understand the importance of step-up SIP investments in the larger context, especially, when done over a prolonged period.
|SIP with Annual Increase of Nippon India Small Cap|
|Instalment Amount: ₹10000|
|Start Date: 20-08-2012|
|End Date: 22-08-2022|
|Yearly Enhancement (in %): 10|
|Note - 10% yearly enhancement is ₹1,000|
|Scheme||SIP Investment Cost (in Rs)||SIP Value as on 22-08-2022 (in Rs)||Growth Amount (in Rs)||Enhanced Growth Amount (in Rs)||Enhanced Growth (in %)|
|Nippon India Small Cap||₹ 12,00,000||₹ 42,40,744||₹ 30,40,744|
|Nippon India Small Cap||₹ 17,40,000||₹ 54,36,539||₹ 36,96,539||₹ 11,95,795||28.2|
|Step up SIP Increment||₹ 5,40,000||₹ 11,95,795|
It is not surprising how SIP investments must be planned just like other personal finance decisions. Stepping up investments gradually helps you earn more while continuing to manage your finances. One way can be is to step up your investments as your income increases.
Rahul Agarwal, Proprietor, Advent Financial says, “Step-up or Top-up is a facility available for investments under the SIP mode where the investor can specify an amount or percentage by which the regular SIP instalment amount should be increased at preset intervals for e.g. half yearly or annually. This simple strategy can accelerate the wealth creation journey for investors and ensures financial discipline since the regular increase in savings can help investors keep pace with inflation."
“In my view and experience, I have seen that an annual increase (step up) of the SIP amount works well for most people since it is common practice to review personal finances once a year. For salaried individuals, hikes are also generally done once a year so I think an annual frequency is optimal," Agarwal added.
Given below is a simple illustration to elucidate the same.
Assume that you have a SIP investment of ₹5000 every month in a mutual fund with an 11 per cent return rate every year. Now you decide to step up your SIP investments by 10 per cent every year for the next 15 years. The calculations in the following sheet underscore the difference in the final corpus earned.
|Number of years of investments||SIP Investment Every Month (in Rs)|
Total Investment Every Year (in Rs)
Growth in Investment (in Rs)
|Source: Advent Financial|
The idea behind increasing investments on a frequent basis is to optimise mutual fund returns from a long-term perspective. This explains why many people add a new SIP or increase the SIP amount at regular intervals.
Deciding step-ups in investments
Automating investments is indeed the best possible way to stay invested without worrying about market movements or forgetting to continue with your investments. Stepping up your SIPs helps reach your investment goals faster. Also, it has an enhancing effect on the corpus amount, which is necessary to tackle inflation in the long run. However, stepping up SIPs should not be a random decision.
Dev Ashish, Founder, Stable Investor says, “How much to increase depends on a lot of factors like a rise in income, rise in expenses, near term goals that require funding, ongoing loans which you may want to prepay, etc. But ideally, you should try to increase or step up your investments by a rate at least equal to your income growth rate. If you can control your expenses and not allow them to rise as fast as your income (via lifestyle creep), then you can even step up your investments at higher rates. But if you can’t manage either, then something is still better than nothing. So, increase by whatever you can. Even five per cent is better than not increasing at all. And the benefits add up.”
Ashish explains the effect of increase citing the following example, “Let’s say you want to do a ₹25,000 monthly SIP. Now if you keep the amount constant, then after 15 years, you will have about ₹1.05 Cr if you generate 10 per cent average returns. But if you were to increase your SIP by a small five per cent every year, then your corpus will be almost ₹1.38 Cr. You increase your final corpus by more than 30 per cent and that too by just increasing investment every year by five per cent.”
Ashish also advises his investors to look at this through the lens of goal. Suppose you need to accumulate ₹3 crores in 20 years. Assuming that you earn about 11 per cent average returns, then you have three options –
- You invest ₹39-40,000 constant SIP for 20 years, or
- You start with ₹27-28,000 and then increase SIP by five per cent every year, or
- You start with ₹18-19,000 and then increase SIP by 10 per cent every year.
So, the option of stepping up SIP can also work for those who don’t have a big surplus amount to start with. They can start small and then, every year or two, increase SIP by 5-10 per cent. Indeed, SIP helps to automate both savings and investments while taking care of market uncertainties. This helps them gain from rupee cost average investing too. Stepping up your SIP investments not only pushes up your investments but allows you to save and invest more in a disciplined manner in line with your current income and financial needs in the future.
Pratibha Girish, Founder, Finwise Personal Finance Solutions says, “Your income increases every year. Your investments should therefore mirror 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; more so if you reach them earlier than anticipated. However, you may not have surplus funds to put in one go early in your career. You can, therefore, start a SIP with a lower contribution that you can step up with an increase in your income to meet your various financial goals. A lot depends on how long you should continue with your SIPs or to what extent you must step up your SIPs. If you want to achieve a higher corpus early, you may push up your SIPs steeply early in life, though the time spent in investment matters. However, if you are ready to continue with staggered investments for up to the next 10-15 years, you may consider stepping up your investments slowly.
If you have massive financial goals, you must consider investing through SIPs over a long period 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 lacking in financial discipline. The main attraction of SIP is convenience. You can automate the payments on your salary day. You can safely assume that your income would increase by 10 per cent and go for a step-up amount of at least five to seven per cent. With every annual bonus, hike or increment, add to your SIP – the power of compounding is at play here and it will reap higher returns. Also, investing in mutual funds via SIP over an extended period makes market timing irrelevant.”
Regular income matters
For those with access to regular and continued income, SIP investments may be easy and an easy feature to add to your portfolio. However, many people opt for freelancing and other gigs, thus, causing them to be at the receiving end of sporadic income, thus, making it difficult for them to continue with their SIP investments. They can opt for the “Pause SIP” option or choose to invest through staggered payments, with each subsequent investment being more than the previous ones made.
In case, investors start earning again, they can renew their SIP investments depending on whether the funds are in sync with their financial goals. Stepping up SIPs does not have to be a lifelong affair. Like other investment options, you must frequently review your investments and revive them, if deemed fit. The idea is to remain disciplined with your investments instead of adopting a haphazard attitude towards the same.