Investing in mutual funds via a systematic investment plan (SIP) is a smart way to progress towards achieving your goals. It also helps you stagger your investment over time, and alleviates the need to arrange for a significant corpus to get started with your investment journey. Furthermore, it allows you the flexibility to start, stop, or pause your investment at any time.
However, just continuing your SIP over time with the same ticket size may not be beneficial. Just like you get a raise in your salary every year, even your investments deserve one. Increasing the ticket size of your SIP on a yearly basis will help you achieve your goals much faster than anticipated. In that way, you can square away your goals one by one and work towards setting newer goals.
Why should you increase your SIP ticket size?
As mentioned above, increasing your SIP ticket size as your pay increases helps you realize your goals sooner than expected. To add to that, by increasing your SIP ticket size, you will combat inflation more effectively. As per India Today, the retail inflation rate in April 2022 stood at a whopping 7.79%, which is an 8-year high.
When the prices of goods and services are rising at such a steep rate, you will need more money to achieve the goals you set months or years ago. Here, the villain is inflation, which pumps up the price of goods and services over time. Therefore, you will need more money than what you anticipated to achieve the same goal.
The best way to combat inflation is by making investments in avenues that have the potential to beat inflation, such as stock markets and equity mutual funds. However, not everyone is comfortable with investing directly in stock markets due to the fact that such investments come with significant inherent risks and call for careful evaluation of various parameters. Therefore, for novice investors, mutual funds are a better bet as they are managed by a financial professional called the mutual fund manager.
How does inflation affect your investments and savings?
Inflation eats into your returns and reduces the actual rate of return on your investments over time. An inflation rate of 8% is likely to reduce the worth of your savings by a significant margin over the next eight years. The following table shows how inflation affects your investment:
|At the end of 1st year||Rs 92,000|
|At the end of 2nd year||Rs 84,640|
|At the end of 3rd year||Rs 77,869|
|At the end of 4th year||Rs 71,639|
|At the end of 5th year||Rs 65,908|
|At the end of 6th year||Rs 60,636|
|At the end of 7th year||Rs 55,785|
|At the end of 8th year||Rs 51,322|
Therefore, it is critical for investors to stay ahead of inflation by investing in suitable investment avenues. Furthermore, what helps you as an investor in keeping inflation at bay is staying financially disciplined and making regular investments. You should also increase the size of your investments on a regular basis, just as your salary increases periodically.
By how much should you increase your SIP ticket size?
As per Deloitte Touche Tohmatsu India research, the average salary hike in India in 2022 is expected to be around 9.1%. It would be ideal to set aside at least the amount by which your salary increases towards enhancing the ticket size of your SIP. However, remember, the more you invest the better and sooner your goals can be achieved. You may consider increasing your SIP by at least 10% every year.
Automate your SIP increment through step-up SIPs:
If you don’t want to deal with the hassles that come with increasing your SIP regularly, you may opt to invest in mutual funds through step-up SIPs. These SIPs are also referred to as the top-up SIPs, and allow investors to increase their SIP ticket size by a predetermined percentage or amount at regular intervals. You can decide the step-up size by assessing your financial goals and other parameters.
The following table shows how much excess money you would earn by investing through a step-up SIP as against a regular SIP. In this example, we have considered the step to be 15% from the 2nd year onwards.
|Parameter||Regular SIP||Step-Up SIP|
|Monthly SIP||Rs 15,000||Rs 15,000|
|Yearly step-up value||0||15%|
|Investment tenure||15 years||15 years|
|Wealth generated||Rs35,68,863||Rs 61,15,287|
As you can see from the table, investing in mutual funds via a step-up SIP with a step of 15% is expected to yield you an additional amount of a whopping Rs 25,46,424 as compared to investing via a regular SIP.
Word of caution:
Step-up SIPs are for sure going to be beneficial in the long run for investors. However, there are certain factors that must be taken into consideration before opting to invest in mutual funds via a step-up SIP. The first and foremost thing is that your income must rise at regular intervals. If not, you may find it difficult to arrange for the step-up every year.
Also, you must ensure that there is no loss of income as such an incident may lead you to pause or terminate your SIP. Also, before you decide on the step size for your step-up SIP, you must consider your lifestyle and probable life events. This is important as you may have to set aside a sum to cover expenses arising due to the occurrence of such events.
Increasing the ticket size of your SIP is recommended in order to achieve your goals faster. You may automate this process by opting to invest in mutual funds through a step-up SIP over regular SIPs.