Oct 13, 2017 01:12 PM IST | Source:

Want to increase your monthly investments? Go for mutual fund SIP top-up

Your SIP investment must go up as your income rises.

Adhil Shetty

Investment is a long term and a long drawn process and the results are yielded after good amount of patience and sound decisions. As an investor you should keep on reviewing your needs, depending on your age and fund vis-à-vis inflation. Your systematic investment plan (SIP) is one such investment that needs stepping up every year, especially in your younger days. It should be increased every year in line with inflation rate, income status, and investment goals.

Need for SIP top-up

The need to step up any investment has its basis on the fact that the value of currency is eroding with time. According to consumer price index, today’s Rs 206.50 is equivalent to Rs 100’s value 10 years back. The average inflation rate in the last 10 years has been 7.57%. In the last 20 years, the average inflation rate has been 6.54%.

Let us assume that you have calculated your future wealth requirement to be Rs. 1 crore in 20 years. However, accounting for inflation trends in the past 20 years, a better target may be Rs. 3.5 crore. This is assuming that the average inflation rate will remain approximately the same as the recent past.

A higher target may seem difficult to get today, but it is a worthier goal and would protect you against the adverse effects of inflation. Therefore, to commit to a more challenging investment objective, you can periodically increase your investments in tandem with the rise in your monthly income via annual appraisals or bonus income. Not only will this help you create greater wealth but also beat inflation.

You SIP top-up amount and type would depend on factors like your age, investment years available, and financial goals. Your age especially is key—nearly as important as the rate of return on the SIP. A greater investment tenure (for example, from the age of 30 to 60) offers greater chances of compounded returns, allowing you to accelerate towards your goal as you approach retirement.

The impact of compounding, coupled with a gradual stepping up of your investments, would allow you to achieve investment targets that may sound impossible to achieve today. With disciplined investing and smart planning, you can secure yourself financially.

Stepping up your investment
Investing With Rs. 10,000 A Month
Particulars Fixed SIP Step-up SIP
Monthly Contribution Rs. 5,000 Rs. 5,000
Final Year Monthly Contribution Rs. 5,000 Rs.  30,500 (approx.)
Annual Step-Up Nil 10%
CAGR 12%
Tenure 20 Years
Corpus Rs.  49.95 lakh Rs.  87.50 lakh

The table in the article is indicating a goal of investing around Rs 5,000 monthly. Either you would commit a fixed amount every month with a long-term plan or you decide to go ahead with a step-up SIP where your monthly contribution increases by some per cent annually. Considering the mutual fund you are investing in, CAGR has been assumed at 12% in the table.

In the step-up plan, you start with a monthly investment of Rs. 5000 and increase this by 10 percent each year – Rs. 5500 in the second year, Rs. 6050 in the third, and so on. In the final year of your 20-year plan, your monthly contribution would have risen to Rs. 30,500. This may seem a lot today. In 20 years your income too would have risen substantially, and the inflation would have eroded the value of the rupee as well.

It is obvious from the table stepping up contribution has yielded better results. So, stepping up has great deal of advantage. However, at any moment you find it tough to step up investment, the choice of withdrawing is always there.

(The writer is CEO,
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