When we set aside a small amount of money for the future, we understand the power of SIP’s; and when we continue investing and stay invested for a long time, we see the magic of compounding.
But if you want to see real sorcery then you must add a dash of “annual step up” to your SIP. The difference in your corpus is astounding! This combination of SIP + Time + Step up is the most powerful weapon for creating wealth.
Have a look at the numbers in the illustration below to see the impact when you add SIP step up as a strategy:
Scenario 1: SIP amount 10,000, 15 years, CAGR 12%, End corpus – Rs. 50.5 Lakhs.
Scenario 2: SIP amount 10,000, Step up 10%, Period 15 years, CAGR 12%, End corpus – Rs. 87 Lakhs.
As you can see, the simple act of stepping up your SIP by 10% over your previous year amount for 15 years can make a difference of nearly 37 lakhs in your final corpus in this case.
Now, while the numbers are truly drool worthy, this is easier said than done. As they say, investing is easy – but wealth creation isn’t. The reason for this is that there are WWD (weapons of wealth destruction) all around us. Our own behaviour works against us. It’s our fear and greed which don’t allow us to stay invested, and time is the most essential ingredient for compounding.
Staying invested requires conviction. This can come by getting a financial plan made, defining your goals and ensuring you have an investing expert by your side who not only understands you but also can step in and guide your behaviour when required.
Here are a few ways in which you can make a SIP step up strategy successful in the long run.
First (and we cannot stress upon this enough!), align your SIP to a clearly defined, time bound goal that is meaningful to you. When you make an ad hoc investment for no real purpose, you are starting off with a huge psychological disadvantage. And when you add another variable like an annual step up into the equation, it becomes nearly impossible to sustain unless the “why” is extremely strong.
For instance, if you’re targeting a corpus of 85 lakhs for your child’s higher studies which is 15 years away, you are much more likely to step up your SIP of Rs. 10,000 per month with discipline (not once but 15 times) than say, if you just “want to save 85 Lakhs”.
Second, the management of behavioural pitfalls is key. Returns from equity-oriented SIP’s are non-linear; and frustrating, elongated low return phases are not at all uncommon. Imagine running your SIP for 3 years, stepping it up thrice, and seeing your investment in the red after all that hard work and effort due to a geopolitical crisis or pandemic-like situation! Having the support of a “behavioural coach” during such a time will be critical to ensure continuity so that you can reap the rewards of your patience and discipline when mean reversion inevitably kicks in.
Third, don’t overextend yourself. It’s very easy to become over-exuberant during the financial planning exercise and opt for a step-up amount or percentage that is difficult to maintain over the long run. The thumb rule for a successful step-up plan is that it should be like a slow jog – it should feel easy, so that you can do it for a very long time without feeling the heat!
And finally, put it on autopilot. How many investors who say that they will come back and manually increase their SIP’s every year actually end up doing so? Zero! So, make use of the tech tools available these days and lock in a fixed amount or percentage increase at the point of starting itself.
Although you can easily cancel this later, the simple act of putting it on auto mode hugely increases your chances of success. In the end, life is unpredictable, and if a contingency does force you to scale back your step-up plan, so be it! When it comes to long term goals, the beauty lies in the fact that there will be multiple ways to course correct later – sometimes with just minor adjustments.
If you can execute the SIP + Time + Step Up strategy in your investing, the sky's the limit, there truly is no aspirational goal that you cannot meet!
Harsh Gahlaut is the CEO of FinEdge