There is one aspect of investing that many people miss out on. A recent interaction with a friend highlighted this point. He told me that when he started working several years back, he earned Rs 30,000 a month. He invested Rs 10,000 a month via mutual fund SIPs (systematic investment plans). That is, he was investing about 33 percent of his income in MFs (mutual funds). Fast forward to the present, he now earns around Rs 3 lakh a month. But he only runs a monthly SIP of Rs 25,000. This translates to around 8 percent of his income!
It is true that due to increased financial and family commitments, he had been unable to increase his investment substantially. But most times, people themselves don’t feel the need to do so.
They feel that once they started a SIP, their job is done.
It is assumed that investing via SIPs each month for a long period of time would be sufficient. But if you think about it, people’s income doesn’t grow that way. People’s salary grows over time.
So, if the income (or salary) grows regularly, then why not your investments?
And that is why it’s advisable to increase your SIP amount by at least the rate at which your income grows. Let’s say you start with Rs 10,000 monthly SIP.
Now your income increases by about 10 percent every year. You could step-up your SIP by 10 percent every year, too.
That means, that in the first year, your monthly SIP amount will be Rs 10,000. In the next year, it will be Rs 11,000 and so on.
There is another way to increase your SIPs every year by a fixed amount instead of a fixed percentage. So, you can start with Rs10,000 per month and then step up the SIPs by, say, Rs 2000 each year.
Stepping-up your SIP to match your rising income inflows is the best way to gradually but surely build up a huge corpus over time.
SIPs must match incomes
Here is a small example. Suppose you start a monthly SIP of Rs 5000 for the next 20 years. Assuming that your investment grows at 12 percent per annum, you will end up with a corpus of Rs 49-50 lakh at the end of 20 years. Do note that in this example, you kept your monthly SIP commitment fixed at Rs 5000 only. Now consider another scenario. Suppose you increase your SIP amount every year by 10 percent. Can you guess your portfolio size at the end of 20 years? It will be Rs 95 lakh to Rs 1 crore. You would have invested more, too (about Rs 33 lakh instead of Rs 12 lakh in the previous non-increasing SIP scenario). But that is because your income would have also increased every year over 20 years and it would have been easily possible for you to increase the SIP by 10 percent every year.
Stepping up the SIP also inculcates the discipline of investing more when your income increases every year. That way, the extra money that you earn and which may have been otherwise spent on unnecessary purchases, is channelized and gets invested for your goals.
Many AMCs offer step-up SIP as an automated facility through which the monthly SIP contributions can be increased by a predetermined percentage or an amount at periodic intervals. But investors can even do this manually themselves every year.
Many investors who had started their SIP journey with a small amount continue the same small SIP amount even after several years. And that despite their income growing well during that period. This can be mainly attributed to laziness and financial indiscipline on their part. Ideally, doing a step-up SIP where the invested amount increases every year is the way to go. It is what will help increase the final corpus size that the investors get eventually.