Why You Should Increase Your Mutual Fund SIPs Every Year
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It has been proven again and again that equity is the best proposition when it comes to generating inflation-beating returns over a period of time. And for someone who is not savvy enough to invest directly in stocks, investing in mutual funds is the way to go. Systematic Investment Plans (SIPs) work on the principle of compounding, where the returns on your investments generate their own returns over time.
"Most people's incomes increase each year, but often their investment amounts do not. By consciously increasing your SIPs annually, you can make your money work harder for you. This approach helps in building a larger corpus faster, taking advantage of both the growth in your income and the power of compounding," says Sharda Deepakraj Lala, AMFI Certified Financial Advisor and Founder of Siddhantha Wealth Managers.
You can increase your allotment to SIPs every year, but also choose specific products. "There are financial products like step-up SIPs which automatically increase the allocation as per the mandate provided by investors at the initiation of the SIP," says Gaurav Goel, SEBI registered Investment Advisor.
How It Helps To Meet Your Goal
"If the resources in present financial situations are less than required to achieve goals one should opt for increasing SIP every year. If you are receiving income growth 10-15 per cent every year then the investment amount can also be increased to achieve your goal faster and create wealth," says Hina Shah, director, LUHEM, a financial planning firm.
Increasing SIPs each year can help you meet significant financial goals, such as retirement, more effectively than maintaining a constant investment amount.
Let us assume that you are 40 years old and need a retirement corpus of Rs 10 crore to retire when you are 60. In case you want to achieve your goal with SIPs, you need to invest Rs 1,08,713 monthly. This may seem a big amount and you may not have this big a surplus every month to invest.
The other option is to increase your SIP amount by 10 per cent every year. In that case, your monthly SIP amount for the first year comes down to Rs 53,673. With an increase in income, you can increase this amount by 10 per cent every year to meet your goal of creating a Rs 10 crore retirement corpus when you are 60.
What To Keep In Mind
While increasing your SIP contributions helps you in meeting your goals, there are a few things you need to keep in mind.
Be Disciplined: When it comes to investments, discipline is key. So you should never pause or terminate your SIP. "Many investors pause or terminate their SIPs as they start timing the markets and investing biases start kicking in. This is a cardinal sin and should be avoided at all costs," says Goel.
Assess Your Risk Tolerance: If you have a high risk-taking capacity and your goal is long-term, you might choose to invest in mid-cap or small-cap funds. If you prefer lower risk, large-cap funds may be more appropriate.
Diversification is important: It is always prudent to invest in more than one SIP. However, it's equally important not to over diversify as it becomes difficult to manage the investments. Ideal number of SIPs range between 3-5. Care should also be taken to diversify your SIPs between different investment strategies like large cap, small cap mid-cap etc.
Review Fund Performance: Regularly review the performance of your chosen mutual funds. "If your current funds are performing well and align with your financial goals and risk tolerance, you might continue increasing SIPs in the same funds. However, if you find better performing or more suitable funds, consider diversifying your investments," says Lala.
By thoughtfully increasing your SIP contributions each year and choosing the right mix of funds, you can build a robust investment portfolio that grows in value over time, effectively countering inflation and helping you achieve your long-term financial objectives.