Annual appraisals have begun and most of you’ll have already planned on how to spend that extra bucks from the salary hike. For those who are not keen on spending that amount, must’ve planned on investing it. The investing clan would’ve already had existing SIP in mutual funds based on their goals. So increasing investment in SIP might not seem a good idea. So, the tricky question is where the extra money can be invested.
If you don’t have any investment in mutual funds then start investing now. It’s never too late to start investing in mutual funds and any time of the year is considered the right time to invest in mutual funds through monthly SIP.
By how much should you increase your investment in SIP?
If you have existing investments in mutual funds through SIP’s then I would suggest you increase the SIP amount by 10%. 10% is usually considered an ideal increase in the SIP amount every year. The investor can increase or decrease this percent according to his/her investing capability.
Why should you increase your investment in SIP?
You will certainly ask why one should increase the SIP amount when the existing SIP’s are already there. I’m sure the SIP amounts that are currently present are calculated considering a certain rate for inflation and return on investment so that the goal can be achieved at the intended time. But what if the inflation in the country is more than what is was expected and by the time the tenure of the goal is reached you have lesser amount than what was intended to be. If the inflation turned out to be as planned then this will help you accumulate a larger amount than originally intended to in the same time span as your goal originally was planned to.
Example of Step Up SIP: Priya, Raj and Rohit all start with a monthly SIP of ₹5,000 in an equity fund. While Raj opts in for a 10% SIP Step-up annually, Priya opts for a 15% step-up. Rohit is not convinced of Step-Up SIP and does not opt for annual SIP increase. After 30 years of investing, Raj’s SIP investment grows to ₹3.96 crores while Priya’s investment grows to ₹7.64 crores. Pretty impressive with a starting SIP amount of ₹5,000. Meanwhile, Rohit who did not opt for Step up SIP, ends up with only ₹1.53cr. Thus a 10% annual increase in SIP can grow your wealth by 2.5x in 30 years!
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Maintain your level of expenses
As the salary increases the expenses need not increase. Maintain your expenses and if necessary cut down on the unnecessary expenses to meet the investment needs for new goals or the existing ones. If the hike wasn’t a satisfactory one or there was no hike at all, then invest only in your capacity. Do not borrow money or hamper your current living conditions by cutting down on necessary expenses so that you can invest more.
To conclude, I would say increase your SIP investments in existing ones or start new SIP’s. Because it is better to end up accumulating more than required sum than ending up with a lower sum.