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 25th 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 18th year and Rs.85,000/- in 25th
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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