Why you should step up your SIPs

Many talking heads on television, experts and investment advisors constantly implore retail investors to continue their systematic investment plans, or SIPs , despite the recent turbulence in stock markets. While continuing the SIPs is, no doubt, important, what is equally important is increasing the SIP amount as and when your income increases.

A fixed monthly SIP amount could leave you with a smaller pot of money at retirement or for any other goal for which you are saving . One reason for this is ignoring inflation while setting a target. A ₹1-crore goal for retirement may sound big today and you may base your SIP on this target. But if you are young and have many years to go before retiring, the value of ₹1 crore at the time of your retirement may not be the same as it is today. Thus, you may find yourself running short of a comfortable corpus if you don’t increase your SIP amount at regular intervals. This is especially true for investors who are in their mid-20s to mid-30s as they have a longer period to accumulate money for a nest egg.

If you start with a smaller SIP amount, because that is what you can afford, it would help to increase the allocation whenever you can afford more. This will help you build a larger corpus over a longer period of time.

Let’s take an example. Say, you are a 23-year-old and want to travel the world at some point in your life and buy a house. Based on inflation expectations, you estimate that you need ₹10 lakh to travel the world after 10 years and ₹60 lakh after 20 years so that you can buy a house (could differ based on the city you live in).

These are the only two financial goals that you have as of now. To accumulate enough money for both goals you choose to invest every month in an equity mutual fund.

For the travel goal, you can now only afford to invest ₹2,000 a month, and for the goal to buy a house, you can afford to invest ₹5,000 a month. You decide not to increase your SIP allocation each year, and continue investing the same amount for both the goals. To keep it simple, you expect a CAGR of 10 per cent over the 10- and 20-year periods.

After 10 years, the ₹2,000 a month that you invested will grow to just ₹4.13 lakh; while after 20 years, the ₹5,000 a month that you invested will create a corpus of ₹ 38.28 lakh. You will undershoot both your goals by a large amount.

If you earn a higher return, that itself could help you get closer to the corpus. But this is not a given as it depends on market factors.

Now, let’s see what happens if you increase your monthly SIP amount by just ₹500 every year for both your goals, assuming the same 10 per cent CAGR. For the travel goal, the corpus that you could accumulate at the end of 10 years would be around ₹8 lakh, while for the goal to buy a house at the end of 20 years, you would accumulate around ₹62.75 lakh. The corpus you accumulate almost doubles for your travel goal, while it overshoots your initial estimated amount for your goal to buy a house.

The table given alongside explains various possibilities if you increase your SIP amount by different amounts.

The thing with systematic investment in equity mutual funds is holding your nerve in the face of adversity. There could be markets falling by 10 per cent or stagnating for 2-3 years. It would take a lot of courage to increase your equity SIP allocation in such situations.

Many people park their savings in debt products such as recurring deposits, fixed deposits, public provident fund (PPF), debt funds and small savings scheme run by the government. Debt should be a part of your portfolio, but you should continue your equity SIPs and increase them whenever you can.