Increasing SIP

Are you interested to fulfill your Financial Goal in future? But what if your goal is big and if you think it is not achievable with small SIP? Don’t worry there is a solution for this problem.

The solution is increasing SIP

When we think about SIP (Systematic Investment Plan), we generally means constant SIP, which does not increase year after year. If you think that your future financial goal is very high to achieve the same you will have to start with large amount of SIP, which is not realistic.  The solutionn for this, which is used by most of the financial planners is called as “Increasing SIP”, where one starts with lower amount of SIP and then increase the same year after year. Yes, it is realistic as your income and ability to invest is also increasing every year.

Let me explain you with an example: Sujay who is 25 years young chap wish to accumulate Rs.5,00,00,000 (Rupees Five Crores) at his age of 50 i.e. after 25 years. If he choose the option of constant SIP he will have to contribute Rs.31,000/- per month (@ 12% compounded returns from equity scheme of mutual fund). But since Sujay’s present monthly income does not permit him to save Rs.31,000/- per month, but he expecting his yearly income to grow by 20% and hence he can increase his saving by 8% annually. In this case he can start SIP with Rs.13,500/- per month, right now and increase the same by 8% annually. Now what will happen, in the initial year SIP amount will be Rs.13,500/- which will increase every year by 8% and at 25^th year SIP amount will reach to Rs.85,000/- per month, which might look very big in numbers, but after 25 years from now, it will not look as big as it is now because one’s purchasing power as well as income is also increasing every year. Twenty years back salary of primary teacher was about Rs.5000 but now he is earning salary of Rs.35000/- plus. So don’t get surprise by size of amount in future.

Increasing SIP vs Constant SIP – Which is better ?

At the first instance general conclusion comes into mind is that increasing SIP is better than constant SIP because is it much realistic and convenient as logically investment should rise as the income increases. Let us look two important points relating to this.

1. Investment required in case of Increasing and Constant SIP

The most important thing one has to decide in both the situation is the amount of regular saving needed.  If we take the example elaborated as above, one will be comfortable to start SIP of Rs.31000/- to accumulate Rs.5 Crores in next 25 years @ 12% compounded returns, as he is not confident of increasing his income, year after year.  Whereas other one will be comfortable with initial SIP of Rs.13500/- and then increase the same by 8% per annum. But in this increasing SIP scenario, his SIP amount will reach Rs.50000/- in the 18^th year and Rs.85,000/- in 25^th year.  It might look very big in numbers, but after 25 years from now, it will not look as big as it is now because one’s purchasing power as well as income is also increasing every year.

So you have to decide yourself which scenario is comfortable to you.

If you are thinking that your income is going to increase every year and if you believe on the theory of diminishing rupee value and increasing purchasing power you should opt for increasing SIP. In this case you will have to be disciplined investor and will have to increase your SIP amount gradually every year when your income increases. But if you want freedom of spending in future life with limited financial goal you should prefer to invest with constant SIP amount. The table given below shows the increasing and constant SIP amount required for the example discussed earlier and also shows the ratio of increasing and constant SIP.  

Conclusion

One should start his SIP at the early age to achieve his financial goal for constant SIP amount, if you are late starter then your SIP amount will be very high and will look unrealistic, in this case you must choose increasing SIP option. In my personal opinion increasing SIP is better option even for youngsters, so that they can plan their future better way. 

2. How the corpus will grow in case of Increasing and Constant SIP

Now we will have to consider the corpus factor in Increasing SIP and Constant SIP. In both the forms final corpus will be the same, but in constant SIP overall corpus will be more than increasing SIP because one is investing same amount for longer time and hence getting benefit of compounding. The following chart shows the difference between two and also final outcome.

Following table will show you how your corpus will grow in Constant SIP and Increasing SIP. Since you are starting with small amount in Increasing SIP the final corpus may be less than constant SIP, but since you are making your financial goal according to availability of funds, option of increasing SIP is always better.  It will help you to make discipline savings from your increasing income.

Above charts and examples are based on the assumption that SIP tenure is 25 years in diversified equity scheme of mutual fund. While making calculations returns are considered @ 12% compounded per annum. Actual results will differ depending on market returns.  But history of mutual funds shows that good performing schemes of diversified mutual fund schemes have delivered annualized returns of over 20% for the tenure of 25 years. Make your investment decisions after having consultation with your financial advisor. You are also advised to go through the offer documents of the scheme.

Mutual Fund investments are subject to market risk.

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Q 1      :           FROM MY SAVING BANK A/C, I CAN WITHDRAW MONEY ANY TIME AS WELL I AM EARNING 4% INTEREST ON IT ALSO, I WISH TO EARN SOME MORE INCOME FROM IT, KINDLY GUIDE ME PLEASE?

Ans         :           TWO OPTIONS ARE AVAILABLE BEFORE YOU;

Without taking more risk if you wish to earn some more income along with facility to withdraw money any time, just use you Net Banking facility and park funds online into Mutual Fund’s LIQUID/MONEY MARKET schemes. For withdrawal of funds, submit Redemption instruction ONLINE, the funds will be credited into your bank till 12 p.m. next working day. Through Parking of funds into liquid schemes you may earn approx. 6% to 10% appreciation, difference between the Purchase and Redemption NAV. If you are a first time investor, do not forget to make a TIK MARK on iPIN.  Minimum investment under the schemes is Rs. 10,000/-.

Or

1.             Just think of Mutual Fund’s Liquid Schemes. Park your surplus funds in Liquid fund units, which are very short term nature and earn approx. 6% to 10%, the appreciation is difference between Purchase and Redemption NAV. You may invest in Liquid fund units by availing Net Banking facility provided by your Banker.  Withdrawal from the units is so easy, so as to get your bank a/c credited till 12 noon, next day.  Minimum investment under the scheme is Rs. 10000/- . If you are a first time investor, do not forget to make a TIK MARK on iPIN.

2.             If you are ready to accept risk of Equity Share market as well wait for some period, but don’t have knowledge of  Equity Share market then you are advised to invest into Equity Schemes of Mutual Fund. Here you are advised that instead of investing all funds once a time, get a benefit of ups & downs of market. At every down trend of market invest some amount,  if you feel at upward movement you  are about to receive your expected income just submit online redemption request, on fifth working day, mutual funds will credit the funds into your bank. E.g.  If your saving bank a/c have investable balance of Rs. 25000/-, at 2 o’clock you are observing, index is down by 200 points, opportunistically invest Rs. 5000/-, at next down trend invest more Rs .5000/- & so on. When market is in Bull Run and you observed that the market value of investment is increased upto your expectation, submit redemption request. You may do so regularly and earn some more income. But if you do wish a long term investment then think to invest SIP by SIP every month for 15 to 20 years consistently.

  Q 2      :           I am a Businessman / Professional, having Current A/c in Bank. I am not receiving any types of interest on it. Also at Week end day’s idle amount, I do not get interest too. How do I earn income on this balance amount?

Ans      :           You have asked Very Good and Important question. Thank you!!! On Friday (or before any Bank holiday) before 2 p.m., transfer your Current a/c balance into Mutual Fund  Liquid scheme units by availing Net Banking facility provided by your Banker. The NAV applicable will be of THRUSDAY, if you are submitting redemption request on Friday itself before 3 pm, your current account will be credited with appreciation till 12 pm on Monday, by redeeming your units as per Sunday’s NAV. It means you are receiving appreciation from NAV difference between Thursday and Sunday.  You may earn approx 6% to 10% more income from the transaction.  In a year, total 104 Saturday, Sunday’s + 15 Bank holiday’s = 119 days more income may be earned by doing such like transactions. E.g. Approximately, if you are transacting Rs. 10 lacs and availing this facility, this year your income will be exceeded to Rs. 19500 to Rs.  32000/-.  To complete the transaction needs to spend only 5 to 10 minutes only.  Do you need some more information about and tax details and how to do it?  Do not hesitate or waist your time rather to contact me immediately.  Your call is welcome on my cell 9422430302.

Q 3      : What is the risk involved in Liquid Fund?

Ans      : The corpus of  the Liquid Fund is invested in Money Market Instrument & Debt Securities which carries specific interest rate depending on Interest rate scenario. Risk Involved: Rate of Interest & Credit rating. Hence it is very low risk product.

Q 4      : What is the alternative product in Mutual Fund for Bank’s FD (Fixed Deposits) and what is the benefit of the same?

Ans      : Alternative for Bank FD is FMP (Fixed Maturity Plans) which are mutual funds schemes with a pre-specified tenure. This product has very less risk of capital loss since the amount is invested in debt and money market instruments. FMP's score over fixed deposits because of their tax efficiencies both in the short term as well in the long term. When you put money in a fixed deposit, the interest gets added to your income. In FMPs longer than a year, if you elect to take all your gains as capital appreciation, the taxation is merely 10 per cent with indexation benefit or 20 percent with indexation. More for information and investment please call on my cell 9422430302