You Should Increase SIP Amount Now
You should increase the SIP amount each year by 10%
Today, your savings are more valuable than your savings in the future
Many of you already have Systematic Investment Plans (SIPs) for your long-term or short-term financial goals. But, simply continuing may not be enough. It would be best if you consider ramping up your SIP investments now.
In the current market slump, the poor performance of your SIPs can be disheartening. However, investors who carry on with ongoing commitments benefit from a severe crash in the long run. There are two choices: Top up existing SIPs or invest lumpsum in a staggered manner.
How SIP works
When you invest a fixed sum every month irrespective of how the market moves, you buy units in funds. When a market price is high, your invested amount fetches lesser units. While at lower prices, you buy more units with the same amount. In weak market phases, you accumulate more units, and its benefits become apparent when markets start to move up again.
It Helps Beating Inflation
As per the natural phenomena, money is being devalued each year. Therefore, it needs higher saving for beating inflation. It requires active financial steps to stay ahead. Starting with a small amount and increasing your investments every year helps more than you can imagine, and these steps put you ahead of inflation.
Effect of Increasing the SIP amount
If you can increase the SIP amount each year by even 5%, it can have a dramatic impact on your final goal. A 10% increase means earning an additional 8 lakhs (considered investment of monthly SIP of 5000 in equity with the expectation of about 12% annualized return) in a 10 years’ time frame. The 15% increase will result in a long term corpus that’s almost three times bigger.
Down Market Means – More Units
In the current market slump, the index value has eroded 30% in just fewer than two months over February and March. The downswings are thus testing for the SIP to deliver healthy returns. If the downturn persists, and you top up your SIP with a larger amount into the fund, it will fetch a higher number of units at prevailing low prices. Eventually, when the market rebounds, those few SIP installments with higher sums will make much difference to your return.
How Can You Approach Your SIP?
Today, your savings are more valuable than your savings in the future. To benefit from the current phase, you must quickly invest lumpsum into chosen equity funds in a staggered manner. Do not just be tied to specific SIP dates and a predefined amount. You invest separately, over and above the ongoing SIP commitments, as experts believe that merely hiking the SIP amount, you cannot capture the downside effectively. If the market rebounds quickly, you will have missed locking into the lower prices by the time your SIP installments hit.
How You Miss Your Opportunity?
Over time, for most of us, incomes would have grown, and so would our expenses. But did our savings grow in line? As we get a raise in our salaries every year, we can afford to increase our investments. Besides, many of us see saving as a burden in the current market scenario. Most people feel they will save only when they have enough money, and this is a fact that escapes many from earning additional financial benefits in the future. It is vital that as your income grows, the amount of investment should also grow.
What About the Market?
It is not easy to predict accurately when the market will bottom out. However, it tends to bounce back much before the recovery of the economy. The equity market has already yielded a high return in the past. In the absence of adequate investible surplus, investors may also consider taking some money out of debt funds or other liquid fixed income avenues to avail future benefit from the current situation.
How Investors Will Gain?
Investors can make up lost ground in terms of corpus deposited towards goals by adding money beyond existing SIPs. If you started SIPs only 3-5 years ago, it would take too long to make up the accumulated loss if you stick with the present outgo. Hike your SIP outgo to make the most of low NAVs. Eventually, this would surely convert into healthy returns from investments, and you will remain on the path towards meeting your financial targets.
How To Do It?
There are two options to step up your SIPs per year. You can decide how much more money you’d like to invest per month and then start a fresh SIP. You can do that in the same scheme or another scheme in the same folio. Some fund houses allow top-up every 6 months, while many others allow an annual increase. However, very few fund houses will let you do that midway. Fund houses mostly allow investors to decide the top-up amount when you start your SIP before paying your first installment.
Start with a small amount of SIP, but start early. Ensure that the SIP amount is increased consistently in line with an increase in your income. Also, increase SIP to take the opportunity of the prevailing situation. It is always better to know from an expert the right SIP amount. Consult a financial advisor.
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