Why and how should you increase your SIP amount over time?
Summary
An SIP in itself is a great wealth-building tool. However, one should increase the SIP contribution to keep up with inflation. When an SIP is coupled with systematic, periodic top-ups, it presents a great opportunity to build wealth at a faster pace. Moreover, a top-up SIP provides numerous benefits such as accommodating for increasing income, fighting inflation, avoiding additional research, faster fulfilment of financial needs, and the inherent benefits of SIP.
Introduction
As we progress in our financial journey and our journey of life, our needs, wants, and standard of living all increase. When our income increases, our aspirations begin to grow, needs that never existed before arise, and we start moving from ‘standard’ to ‘luxury’. The definition of an increasing standard of living may not be the same for everyone, for some it could be moving from a bike to a car, for others it could be moving from a car to a luxury car. However, one thing that remains constant among all is the desire for more.
When we build a financial roadmap to fulfil needs over the long run, we prioritise perceived needs and may not account for growing needs. Even if we want to keep our needs constant over the years, with increasing income, we have the opportunity to achieve our aims and fulfil our needs faster. As investors, we should meticulously plan to park our increasing income in a wise manner that can help us grow and fulfil our needs at an accelerated pace. Hence, it is important to increase our SIP systematically over time.
This gives rise to the question: How to increase your SIP investment over time?
Well, the answer is quite simple - SIP top-up. In this blog, let’s discover what SIP top-up is and what its benefits are.
What is SIP Top-Up?
SIP top-up is an extension of an SIP. An SIP allows you to invest a fixed amount at regular intervals. An SIP top-up allows you to increase your SIP contribution systematically at regular intervals. With SIP top-up, you can add fuel to your wealth-building journey, potentially helping you to fulfil your financial needs faster or build more wealth over the same time frame.
Let’s look at this with the help of an example.
Example 1
If you had started an SIP of Rs 10,000, 25 years ago, you would’ve built an estimated corpus of Rs 1.88* crore. However, if you had added yearly top-ups of Rs 1,530, you would’ve built the same corpus (an estimated corpus of Rs 1.88* crore) in just 20 years, meaning you reach your target corpus in lesser time!
Example 2
If you had started an SIP of Rs 15,000, for a period of 20 years, you could’ve built an estimated corpus of Rs 1.49* crore. However, if you added yearly top-ups of Rs 3,000, you could’ve built an estimated corpus of Rs 3.24* crore, more than double the value of the corpus you build through a regular SIP, in the same time.
To calculate the difference between the estimated returns of SIP and SIP with top-up during different time frames and with different rates of return, you can use the NJ Wealth SIP Calculator.
What are the Benefits of SIP Top-Up?
Let’s look at the 5 benefits of SIP top-up
- Accommodate increasing income - As we progress in our careers and gain more experience, our disposable income also increases. When our income increases, the general human tendency is to seek instant gratification and chase after things that aren’t really necessary, losing sight of the long-term financial needs. Such impulsive decisions are a testament to indisciplined behaviour towards managing personal finances. To make the most of the increasing income, it should be contributed towards fulfilling your long-term financial needs. An SIP top-up is a good way to automatically increase investments by a fixed amount or a percentage at regular intervals to accommodate rising income.
- Fight inflation - If you don't increase your SIP contribution at regular intervals, technically, you are investing less every month as compared to before. This is because inflation erodes the value of our money, decreasing its value and reducing its purchasing power over time. Let’s look at this with the help of an example. Let’s assume you have an ongoing SIP of Rs 12,000 and the current rate of inflation is 6%. In a year, the value of your SIP contribution will reduce to Rs 11,321**, in 5 years, it will dwindle to Rs 8,967**, in 10 years it will shrink to Rs 6,701**, and in 15 years it will be a mere Rs 5,007**. Hence, to preserve the value of your SIP contributions, it is important that you increase your SIP contribution at least in line with the prevailing rate of inflation.
- Avoid additional research - When you add top-ups to your existing SIP or opt for SIP with top-ups, you eliminate the need for any additional research. Deciding what fund to invest in or what type of investing strategy to follow can be excruciatingly time-consuming! But, with top-up SIP, you don’t have to worry about any tedious, time-consuming additional research, since you can continue with the same investment strategy and just increase your investment amount.
- Faster fulfilment of financial needs - As you can see in the example above, with SIP top-up, you can meet your financial needs at an accelerated rate. The added power of top-ups acts as a booster, giving your investments wings of growth. If you had started an SIP of Rs 20,000 for your retirement 25 years ago, you could’ve built an estimated corpus of Rs 3.76* crore. However, if you had added yearly top-ups of Rs 3,000 to this investment, the estimated value of your retirement corpus would be Rs 7.46* crore.
- Inherent benefits of SIP - Since SIP top-up is an extension of SIP, it offers all the inherent benefits of a regular SIP, such as power of compounding, rupee cost averaging, discipline, consistency, and automated investments.
Conclusion
To fulfil your desired financial needs and stay in line with inflation, it is important that we increase our SIP investments systematically at regular intervals. SIP with top-up is the perfect tool to increase your SIP contribution and give pace to your wealth-building journey. With the discipline and consistency that SIP top-up offers, it serves as the best way to invest your additional income while avoiding additional research. Give your SIP the power of top-ups today and add weight to your wealth-building journey. For more information, contact your mutual fund distributor today!
*(Assuming investment in Equity Fund and an average return of 12.62% p.a. as per AMFI Best Practices. Guidelines Circular No. 135/BP/109-A/2024-25 dated September 10, 2024. Past performance may or may not be sustained in the future.)
**Calculation based on assumed inflation of 6%.
Frequently Asked Questions (FAQs)
1) Do I really need to increase my SIP contribution?
The short answer - yes. To stay in line with inflation and to generate a high real rate of return, it is necessary that you increase your SIP contribution at regular intervals.
2) By how much should my SIP increase?
Technically, your SIP should increase at least by the rate of the prevailing rate of inflation. However, you can tailor your investment strategy and increase your SIP amount as per the guidance of your mutual fund distributor.
3) Do I need to register a new SIP with the top-up facility?
No, you can add top-ups to your existing SIPs and enjoy the benefits of a top-up SIP without needing to start a whole new SIP!
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.