Increasing SIP to match a rise in income

Investing through Mutual Fund SIPs is a disciplined investment habit. And one is free from the hassle of remembering every month to set aside and invest a certain amount of money. 

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Similarly, it is no less important to increase your investment via SIPs when you earn more. Mostly with age responsibilities too tend to rise. But sometimes the importance to save with the same pace as one used to do before is lost. Merely starting any Mutual fund SIP is not enough.

Just by stepping it up or by adding an automated feature will increase the SIP contributions after a specific period. It is also called top-up SIP. When you know that your income is going to increase by 10%, you can go for a step-up by at least 5 to 7 percent.

For an example Mr. X used to earn Rs.40,000 a few years ago and he used to invest Rs.12,000 via mutual fund SIPs. That means he used to invest 30% in SIPs. At present he earns Rs. 2 lakh per month but he invests only Rs. 20,000 every month via SIPs which represents just 10% of his income.

Match your investments to your income:

If we have a look at a person’s income by way of salary over a period, it shows a rising trend. But the investments that he makes may not match with it. Even for many years when SIPs are used to invest money, they will not be adequate if they do not increase parallelly with your income. If SIPs are kept in pace with increments in salary, they result in creating a huge corpus.

Always try to see that the investments too go up with salary hikes. If for an example, you get a 10% salary rise every year, you should invest 10% more through SIPs. If you have started from say Rs.5,000 monthly SIPs, then it should be Rs.5,500 in the next year when the amount of salary goes up by 10%.

Let us take another example where you uniformly invest though SIPs and contribute Rs.10,000 every month for 10 years, assuming your investment grows at 12 % per annum, at the end of 10 years you will be able to accumulate a sum of Rs. 23,00,000(rounded off).

But instead of a fixed amount of Rs.10,000 when you decide to increase your SIPs by 10% every year in line with your pay-hike, what will you get at the end of 10 years? Again, assuming the investments to grow at 12% per annum, the amount will be Rs.34,00,000(rounded off). It is clear from the example that step-up SIP will result into more corpus creation at the end of the same number of years. (Invested amount=Rs.19 lakhs, total earnings=Rs.15 lakh) Which means that the increased salary when equated with matching increased SIPs, could fetch tremendous returns. 

Many Asset Management Companies allow step-up SIP plans. Investors have an option to manually adjust the SIP step-up every year. SIPs can be increased by a predetermined percentage or a specific amount can be contributed at periodic intervals.

There are many tailor-made schemes like Step-up SIP, Trigger SIP, Perpetual SIP, Flex SIP and Pause SIP. Use of SIP calculators will ease the process.

Select the step-up option while starting the systematic investment plan as opting for them mid-way may not be possible. To stop this kind of SIPs, cancel it and you can start a new one altogether. In case of liquidity crunch they can be paused for up to 3 months. 

Instead of using money to purchase unnecessary things or spend it otherwise, it is better to park the funds fruitfully and accomplish the investment goals. One need not be an informed investor for this purpose, even first timers can take benefit from it. 

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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