3 MinsJanuary 08, 2020
When receiving an annual salary increase, the initial reaction often revolves around the new spending possibilities this extra income brings. However, it's crucial to consider the impact on your savings as well. While you might already have a set amount dedicated to investments like mutual funds, have you contemplated adjusting this investment to align with your increased earnings? If not, read on to know why it is important to do so.
More money in your hands not only means an increase in the ability
to spend. It also means the responsibility to save and invest more.
When you invest in mutual funds via SIPs, you are automatically signing up for several benefits. For instance, your investment is automated, there is no burden on your budget,
your investment is cushioned from the market volatility, your cost gets averaged out, etc.
Step-up or top-up your SIPS
Ideally, you should step-up or top-up your SIPs year-on-year, by say @10% or more. Take into account real inflationary trends, lifestyle, and assess the future value of your financial goals. As you get annual increments step-up your SIP instalments.
There are two ways you can step-up SIPs:
- By a fixed rupee-basis each year. So, say you have a monthly SIP of Rs 10,000, you can increase this amount every year by Rs 1,000 or Rs 2,000 as per your requirement; or
- By a fixed percentage basis each year, say by adding 10%-20%, to your current monthly SIP year- after-year. Certain mutual fund houses allow investors to automate the top-up, while for others you need to provide a manual request via mandate.
So, check with your fund house or bank when investing.
Also Read: [How to plan the tenure for your SIP?]
More investment, more gain
Let us assume you are investing Rs 5,000 every month in an equity SIP for 15 years and the return is around 12%. Your corpus will be about Rs 26 lakh at the end of 15 years. If you were to increase the amount by 5% every year, your corpus will
increase to around Rs 32 lakh. This means your monthly SIP will increase by Rs 250 in the second year, by Rs 262 in the third year, by Rs 275 in the fourth year and so on. Since you are gradually
increasing the amount every year, there will be hardly any burden on your budget.
The two key benefits of stepping-up your SIP instalment are:
- Counters inflation better – Inflation, or rising prices, erodes the purchasing power of our hard-earned money. The amount that seems substantial to fulfil a financial goal today may not be a few years down the line.
A step-up SIP can help you counter inflation and earn inflation-adjusted returns
- Helps you build a bigger corpus – Stepping up SIPs adds to the power compounding. Since you are investing a higher amount every year, effectively the returns you earn will be higher too. This may even enable you to reach
your goal earlier than the original target date as you will be able to save a higher amount.
Even if you opt for a step-up SIP, do review your portfolio regularly and rebalance it, if required. Discuss with your financial advisor about the asset allocation that is suitable for your needs.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.