Most investors tend to let their SIPs and investments remain fixed while their income keeps growing. While an increase in income certainly does mean an increase in the ability to spend, it is also an opportunity to save more, which is why we should consider incremental increase in SIPs.
WHAT DOES INCREMENTAL INCREASE MEAN IN SIP?
Incremental increase in SIPs are essentially regularly topping up or increasing the periodic investment amount at a determined frequency.
This can be done monthly, annually, or based on investor's preference.
AssetPlus suggests annual or bi-annual top-ups to be the best option. One can increase their SIP either by a fixed amount every year or as a percentage of their existing SIP. Increasing by a certain percentage is the best way to determine the right amount. Ideally, it is advised to increase investments in the same proportion to the incremental increase in your annual income
IS IT FOR ALL?
Anyone who has subscribed to a systematic investment plan (SIP) can opt for a top-up in the same fund. Investors can also increase their SIP by adding a new theme or fund to the existing portfolio. Simply put, increase in SIP is advisable to those who
Have income sources that are increasing gradually
Have a lot of idle money left at the end of the month after meeting expenses and investments
WHY SHOULD YOU INCREASE SIPs?
A step-up SIP allows investors to achieve your financial goals faster.
They can help stay up with the rise in the cost of living. When the proportion of the savings grows along with the rise in income and cost of living, it helps maintains overall savings ratio.
It also acts as a convenient way to fight inflation if the SIP step-ups are done at a rate equal to or higher than inflation.
HOW MUCH TO INCREASE?
The answer to this would depend upon the goals, income, and financial commitments of the investor. To understand this better, we have considered three different scenarios for investors of different ages. We have presumed a monthly SIP amount based on their salary and commitments, coupled with an assumed rate of return of 14%, and they all wish to retire by 50.
SCENARIO 1
Varun is a 25-year-old male who’s earning 45k per month and is in the beginning stage of his career. Given his salary and considering his part-time educational expenses, he would be able to save Rs. 10,000 per month, after meeting his expenses.
Given that the monthly SIP is on the lower end, we would recommend a Step-up SIP of 20% for the initial ten years till his age of 35. Later, as his salary grows, his financial commitments like House EMI/Rent, Children’s Education, Car Loan, etc., might also add up to his expenses. Hence, we recommend maintaining a step-up of 10% after the age of 35.
Since Varun went in for an aggressive step-up in his early years and also managed to maintain a consistent level of step-up of 10% for the last 15 years, he had exponential growth in value to up to 10 crores. Had he allocated the same 10,000 for the whole 25 years without any step-up, his corpus would stand at 2.7 crores.
So the value he earned with an aggressive step-up is 3x times the amount he would have generated without any step-up.
SCENARIO 2
Asha, a 43-year-old female, has a teenage daughter and earns a salary of Rs. 2 lakhs per month. Asha is in a flourishing position in terms of her career and also has support from her husband in meeting the child’s education expenses. As she is starting her savings with only seven years left for retirement, she starts a SIP of 1 lakh per month. We have opted for a step-up of only 5%. The compounded value of the wealth with a monthly allocation of Rs.1 lakh without any step-up is around 1.4 crores, and with a step-up of 5%, it’s around 1.5 crores. This shows a percentage of 5% step-up is negligible, especially when a person is nearing his/her retirement.
SCENARIO 3
Mohit is a 30-year-old male earning a salary of 90k per month. Mohit is in a good position in terms of his career, but he has marriage goals and family commitments to cater to. Since he has to achieve his retirement goal in 20 years, we have gone in for 25,000 monthly SIP, and his step-up percentage would remain consistent at 10% over the course of 20 years till his retirement.
If he had gone for a SIP value of 25k without any step-up, his wealth generated from his investments would have stood at 3.2 crores; however, with a step-up of just around 10%, the value during his retirement is 1.8X the value he would have got without any step-up.
To summarise...
Varun just started with a monthly SIP of Rs. 10,000 and with the right step-up, he was able to increase his wealth 3X in comparison with the wealth accumulated without a step-up in SIPs.
Mohit, though he allocated a monthly SIP of Rs. 25,000 coupled with a mild step-up, he managed to compound his wealth 1.8X at a faster rate in comparison with the compounded value without a step-up.
Asha, though she allocated a monthly SIP of Rs. 1,00,000 which was around 50% of her salary, she was only able to make a small change in her corpus amount with a step-up.
KEY TAKEAWAYS
The sooner, the better - We have heard experts emphasizing on starting early with our investments. But, sometimes just starting early might not be enough. Along with starting early, we should also make sure that we step-up our SIPs in the right funds as and when our income grows in order to accumulate wealth and also to make sure that our investments are inflation-proof.
Stepping up helps you build a bigger corpus - It is clearly evident from the case of Varun that incremental increase in your investment amount can have a huge impact on your retirement corpus and lets you achieve your financial goals faster.
Two aspects are clear now. It is extremely beneficial to increase SIPs regularly and determining the SIP and top up amount are very subjective. Increments to investment must be made keeping other factors like emergency reserve, loan obligations and short-term commitments in mind.
An advisor must evaluate the individual's income and expenses, saving ability, commitments and goals and customizes a portfolio accordingly.
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