Top up your equity SIP as and when your earnings grow

Betting on MFs: Contribution of monthly systematic investment plans remains strong.

Betting on MFs: Contribution of monthly systematic investment plans remains strong.  


Investing a constant monthly amount may leave you with a smaller pot of money at the time of retirement or for any other goal

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

A constant monthly SIP amount could leave you with a smaller pot of money at retirement or for any other goal for which you are saving up money. One reason for this is because you may not consider inflation while setting a target. A ₹1 crore goal for retirement may sound large today and you may base your SIPs on this target. But if you are young and have several years to go for retirement, the value of ₹1 crore at the time of your retirement may not be the same as it is today. Thus, you may find that you are running short of a comfortable corpus if you don’t increase your SIP amounts 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.

Top up your equity SIP as and when your earnings grow

Another reason why you may end up with a smaller corpus is that your affordability might be lower when you start. Hence the need to step up your SIPs as your affordability increases. 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% over the 10-year and 20-year periods.

Little growth

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% 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.

In the table, you can see the various possibilities if you increase your SIP amount by different amounts.

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

Many people park their savings in debt products like recurring deposits, fixed deposits, public provident fund, 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.

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Printable version | Dec 6, 2019 12:46:37 AM |

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