Systematic Investment Plans (SIPs) have become one of the most popular ways to invest in mutual funds. They offer the convenience of disciplined investing, help in wealth creation, and provide the power of compounding over the long term. However, many investors make one common mistake—they invest a fixed amount in SIPs for years without increasing it. While this approach is better than not investing at all, it is not the most efficient way to build wealth.
A simple but powerful strategy is to increase your SIP amount every year. But why should you do this? Let’s explore the key reasons why increasing your SIP investments annually can significantly impact your financial growth.
1. Beat Inflation with Growing Investments
Inflation erodes the purchasing power of money over time. What costs Rs.1,000 today may cost Rs.1,500 or more in the next 10 years. If you invest a fixed SIP amount without increasing it, the real value of your investment decreases over time.
For instance, if you started a SIP of Rs.5,000 per month today, its value in terms of today’s purchasing power will be much lower 10 years from now due to inflation. However, if you increase your SIP amount by 10% every year, you ensure that your investment keeps up with rising costs and maintains its growth momentum.
2. Take Advantage of Rising Income
As your career progresses, your income is likely to increase due to appraisals, promotions, or business growth. If your salary increases by 8-10% per year, but your SIP contribution remains constant, you are not utilizing your growing income efficiently.
A good practice is to increase your SIP contribution proportionally with your salary hike. This ensures that you are saving and investing more as you earn more, which helps in achieving bigger financial goals faster.
3. Enhance the Power of Compounding
One of the biggest advantages of SIPs is the power of compounding. Compounding means earning returns not just on your principal investment but also on the accumulated returns over time.
When you increase your SIP amount every year, you inject more money into your investment portfolio, which leads to a higher compounded amount. Even a small increase in SIP contributions can lead to a significantly larger corpus over the long term.
4. Achieve Financial Goals Faster
Many people invest in SIPs with specific financial goals in mind—buying a house, children’s education, retirement planning, etc. If you invest a fixed amount, you may take longer to achieve these goals. But by increasing your SIP amount every year, you can reach your target corpus much earlier.
For example, suppose you need Rs.50 lakh for your child’s education in 15 years. If you invest Rs.10,000 per month in an SIP with an expected return of 12%, you will accumulate approximately Rs.50 lakh. However, if you increase your SIP by 10% every year, you will reach the same goal in about 13 years instead of 15.
5. Makes Investing a Habit
Many investors hesitate to increase their investment amount, thinking it will affect their monthly expenses. However, by making it a habit to increase your SIP every year, you gradually adapt to investing more without feeling a financial strain. Over time, this disciplined approach ensures that your wealth grows systematically without compromising your lifestyle.
How Much Should You Increase Your SIP?
While there is no fixed rule, a common practice is to increase your SIP amount by 10-15% annually. This percentage aligns well with the general salary growth rate in India and helps keep your investment in sync with rising expenses.
For example, if you start with a SIP of Rs.5,000 per month and increase it by 10% every year:
- Year 1: Rs.5,000
- Year 2: Rs.5,500
- Year 3: Rs.6,050
- Year 4: Rs.6,655
After 15 years, your SIP contribution will be around Rs.20,880 per month, leading to a significantly higher corpus compared to a constant Rs.5,000 per month investment.
How to Increase SIP Amount Easily
- Use the SIP Step-Up Facility: Many mutual fund houses allow investors to opt for a step-up SIP, where the SIP amount increases automatically each year by a fixed percentage.
- Set a Reminder: If your fund house doesn’t offer an automatic increase, set a reminder to manually increase your SIP investment every year.
- Allocate a Percentage of Your Salary Hike: Whenever you receive a salary increment, allocate at least 10-15% of the raise towards increasing your SIP investments.
- Reassess Your Financial Goals Annually: Regularly review your financial goals and adjust your SIP contribution accordingly.
Final Thoughts
Investing in SIPs is a great way to build wealth, but keeping the investment amount constant for years can limit your financial growth. By increasing your SIP amount every year, you can beat inflation, leverage salary hikes, enhance compounding benefits, and reach your financial goals faster. Start today and watch your wealth grow exponentially over time.
