Step up your SIPs to stay ahead
Whether it’s your physical work out or engine oil or learning curve, you’ve always got to add a little ‘something’ to get more mileage…
It’s that way with your SIP investments too. But way simpler.
The Mantra: Systematically Increasing your investments in Systematic Investment Plans!
A SIP (Systematic Investment Plan) is an ideal way to invest in mutual funds. It allows an investor to invest a fixed amount at fixed intervals. During the working life of an individual, the income earned by him/her is not constant and generally goes up with time, experience, upgradation of skills, etc. The traditional form of SIP investing fails to capture this increase in income as investors continue to invest the same amount throughout the tenure. When an individual’s income increases, he/she has the option to start afresh SIP in a new fund or opt for the ‘Step up’ option in the existing funds. Starting a fresh SIP in a new fund will entail going through the basic formalities again whereas a step-up SIP automatically assumes an increase in your contribution year after year! It involves “stepping up” i.e., increasing your SIP along with an increase in your disposable surplus, effortlessly and automatically.
What is a Step up SIP?
Step-up SIP is an option available to SIP investors wherein they can automatically increase their SIP contributions in the fund they are already investing in. The most popular way to step up a SIP is on an annual basis. The SIP can be increased by a fixed percentage each year or by a fixed amount each year, as per the choice availed by the investor. For example, an individual who is currently investing Rs. 10,000 every month via SIP can opt for a step-up plan and ask the fund house to increase his/her SIP amount by either 10% every year or by Rs. 1,000 every year, as desired.
Here’s a list of various advantages of Step-up SIP –
Convenient route to increase savings
As the disposable surplus of an individual increase, there is a general tendency to spend the money. Investors are reluctant to increase their investments in response to an increase in income. The direction of the market could also influence the investment decisions of individuals. Normally, at the time of an increase in income, if the markets are favourable, investors tend to increase their investments. On the other hand, if the markets are down, then investors generally tend to postpone their investment decisions. A step-up SIP enforces the discipline of higher investments at regular intervals so that the additional income is automatically invested.
Useful to achieve goals:
Many investors get anxious when they consider the huge savings required for certain goals like buying a house or retirement planning. In such situations, this option can be used by those who cannot presently contribute the entire sum, which the goal requires, but would still like to start contributing a part of that amount. Let us consider an example of Sam, who wants to save Rs. 2 crores for his retirement in 20 years.
In this case, Sam can start investing Rs. 10,000 per month and increase the investment amount annually to realise his target.
Helps reach financial goals faster:
Step up SIP enables an investor to attain financial long-term goals faster. The incremental investing due to Step up SIPs helps a corpus to grow faster; thereby investors can attain their goals in less time. Let us look at the example below to understand this in detail. Nisha wants to accumulate Rs. 50 lakhs in a period of 15 years.
It can be seen from the above example that if Nisha continued to invest Rs. 10,000 per month, it would have taken her 15 years to achieve her target corpus; whereas, due to a Step up SIP, she could achieve the same in just 12 years.
Helps to fight inflation:
The cost of goods & services increases due to inflation. Something that costs Rs. 1 lac today will cost Rs. 1.22 lacs at the end of 5 years, assuming an inflation rate of 4.0% per annum. Let us take the example of Anand who wants to save Rs. 10 lakhs in 10 years for his child’s education.
In case, during the course of the investment, the actual inflation increases to 8%, then Anand will not be able to achieve his target in time. In such a scenario, if Anand had increased his SIP by 10% every year, then he would easily achieve his goal as per the table below
It is thus very important to increase the contribution to an investment plan so that any deviation in inflation or expected return will not affect an investor’s goal.
Now that we have explained the benefits of following SIP Step-up, let’s look at the caveat:
More / less than expected change in income:
The amount by which the SIP has to be increased is decided at the time of the initial investment and cannot be modified later. This puts a limitation on the usefulness of Step-up SIPs, as the amount by which one’s income will increase, in reality, is not pre-determined. If one’s income increases by more than the Step up amount, then the investor will be faced with an opportunity loss as he is not completely making use of the income raise. At such times, an investor has the option to invest the additional income in some other fund and make up for the difference.
On the other hand, if an investor’s income increases by less than the step-up amount, it can put the investor in a crunch while continuing with the Step up SIP. However, in reality, if the investor finds it very difficult to continue with the SIP, he/she can discontinue it. In any case, the investor should consider the option of Step up SIP for its various benefits as mentioned above.
Comparison of Static SIP and Step-up SIP
Let us consider an example to understand the difference between a Static SIP & Step-up SIP.
We can see from the above table that with an increase in SIP of 10% per year, an investor can double his/her corpus in 20 years.
With that clarity about the benefits of Stepping up your SIP, do you still want to simply cruise along?
Step on that accelerator and pick up the pace of your investments!
Kyon ki bhaiya, sabse bada rupaiya!!
Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. Information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.