Why Should You Increase the SIP Amount Every Year?

The discipline and power of SIPs have made the investing method extremely popular among investors seeking to create long-term wealth. While most people are increasingly aware of the benefits associated with SIP investments, hardly anyone is aware that a consistent increase in SIP investments every year could yield tremendous financial advantages over time as savings invested grow faster, catch up with inflation, and adjust to changing personal needs.

In this article, we will understand the importance of increasing SIP each year and its benefits, and we will provide some practical tips for effective implementation.

Understanding SIPs

A Systematic Investment Plan, or SIP, is an investment option in which a fixed amount is invested at periodic intervals in mutual fund schemes. SIPs are particularly effective because they automatise saving and investing, which helps discipline finances.

SIPs rely on two primary principles:

1. Compounding: Returns on investments generate further returns over time, resulting in exponential growth.

2. Rupee Cost Averaging: You will buy more units of mutual funds when the prices are low and fewer units when the prices are high. It reduces the average cost per unit.

With discipline and compounding, SIPs will help you amass wealth steadily. However, that is not all you can do to maximise your investments-spend more of your money every year.

Importance of Increasing SIP Contribution 

Many investors start the SIP journey with a fixed contribution, for instance, ₹5,000 per month. If you raise your SIP by a small percentage every year, however, you limit the growth potential of your investments to just keeping the contributions static over several years.

1. Power of Compounding:

Indeed, true magic comes out of investments through compounding. When you gradually increase your SIP amount, not only does the initial investment grow, but the subsequent amounts invested start to accrue.

Example:

Compare the following two:

Scenario 1: You are investing ₹5,000 every month in a mutual fund through SIP which is expected to give a 12% return p.a.

• Total Corpus: Approximately ₹1.52 crore.

Scenario B: You begin with a monthly SIP of ₹5,000 per month and increase the instalment amount by 10% every year.

• Total Corpus: Around ₹2.62 crore.

What is the variance? Over ₹1.1 crore! The sheer reason for this huge gap is incremental increases in contributions alone.

Fixed SIP vs. Incremental SIP

2. Beating Inflation:

Inflation gradually erodes the purchasing power of money.

For example, ₹1,000 today might only buy you goods worth ₹500 after 20 years if inflation averages 6% annually. Hence, an investment that doesn’t grow, at least at the inflation rate, loses value in real terms.

Increasing your SIP amount every year—preferably by at least the inflation rate—ensures that your investments grow in real terms and maintain their purchasing power.

Key Insight:

If your SIP increases by 6% annually (to match inflation), the value of your investment stays constant in today’s terms while delivering future wealth.

3. Aligning with Income Growth:

As one gains experience in their job, salary usually increases with increments, promotions, or bonuses. Lifestyle inflation, however, tends to increase your discretionary spending and leaves little for investments.

Increasing your SIP contributions with the proportionate increase in salary ensures that you invest at least a fraction of your increased income into wealth creation and don’t get affected by lifestyle inflation.

Illustration:

• You receive a 10% increase in your salary every year. So, consider increasing your SIP also by the same percentage.
• Example: The amount of ₹5,000 SIP every month in Year 1 will grow to ₹5,500 in Year 2, ₹6,050 in Year 3, and so on. Such incremental contributions, compounded over decades, will help add significantly to your financial security.

4. Increase Your Chances of Meeting Financial Goals Earlier

Whichever is the target corpus for your child’s education, a home purchase, or retirement, increasing SIP will help accelerate the journey to these milestones. The additional amount of money invested each year enables you to reach your target corpus earlier in life or set bigger financial goals.

For instance:

• Objective: To create a corpus of ₹1 crore over 15 years.
• Fixed SIP: It would require a monthly investment of around ₹18,000 at an annual return of 12%.
• SIP with 10% annual increase: It needs a smaller corpus of ₹13,000 a month at the beginning but still achieves the same thing.

5. Creating Discipline to Spend

Increased SIP investments create a routine where people start saving more as their financial situation improves. This discipline helps them:

• Review their expenses and savings habits regularly.
• Make long-term financial goals paramount over impulsive spending.
• Stick to wealth creation during market fluctuations.

How Much SIP Should You Increase?

The amount you need to increase SIP depends upon numerous factors like income growth, financial goals, and inflation. There are generally two common benchmarks:

• 5% per annum: This is a feasible increment for most people, ensuring steady growth without straining finances.
• 10% per annum: This matches typical salary increments and can lead to significant wealth creation over a long time.

Even modest increases, if maintained over the long term, can significantly add to the ultimate corpus due to compounding.

Practical Tips for Increasing SIP Contribution 

Increasing SIP contributions can be very simple to do annually. Just follow these steps and make it hassle-free:

1. Short-Term and Long-Term Objectives:

Make short-term goals like a house or higher education and as big goals as retirement early. Well-defined objectives push you to regularly increase SIP contributions.

2. Review Your Budget Periodically:

Keep track of your inflows and outflows to find areas to increase savings. Now, channel those savings toward increasing your SIP.

• Tip: Utilise budgeting applications or tools to track expenses and allocate savings toward investments.

3. Use Automatic Top-Up Features:

Most mutual fund platforms provide “Top-Up SIP” or “Step-Up SIP”, whereby you can set up automatic annual increases in your SIP amount. This will ensure consistency without much manual adjustment effort.

4. Monitor Market Conditions:

While the general attitude should be steady investment, it is okay to increase contributions when the market dips so that one can buy more units at cheaper prices and get better returns when markets recover.

5. Seek Professional Intervention:

If you’re unsure about how much to increase or where to invest, consult a financial advisor. There are various strategies a professional can implement based on your financial situation and goals.

Benefits of Increasing SIP Contributions

Now, let’s move ahead to the advantages of increasing your SIP amount every year:

To invest in mutual funds using SIPs, you would be required to open a Demat account with an authorized stockbroker – SMC Global Securities. A Demat account makes investments easier as it safely stores all your financial instruments under one roof.

Conclusion

Increasing your SIP contributions annually is a powerful yet underutilised strategy for building wealth. By using the compounding benefit, staying ahead of inflation, and aligning investments with income growth, you can achieve your desired results more quickly and effectively.

This is all you need to initiate your SIP journey or optimise your existing investments and get comprehensive insights on the stock market and mutual funds through SMC Financial blogs. It’s time to take the first step towards securing your financial future.

Small increments do count. Committing to increasing your SIP amount annually sets you up for greater financial security and success.

Disclaimer: This article is only for informational purposes and does not intend to advise or recommend any sort of investment or platform.