Stepping up your SIP is a feature that should be considered by all investors putting in money into Mutual Funds. Read on to know to know how it helps you accumulate wealth.
Systematic Investment Plans or SIPs allow an investor to regularly channel money into a Mutual Fund over a period of time. This allows for rupee cost averaging and a level of insularity against stock market fluctuations, contributing to substantial gains over the long haul.
However, all things don’t forever remain equal, and Mutual Fund companies now offer a facility whereby you can step up your SIP amount after a set period of time has elapsed. This is a feature of convenience that should be considered by all investors putting in money into Mutual Funds.
Turning Income Into Capital
With each passing year, you typically receive a raise in your salary. Your expenses also increase by their own margins. In light of these variables, it seems inefficient to have your SIP amount remain the same year in and year out.
Stepping up your SIP to keep pace with your income will not only allow you to accumulate more money over time, it will also help you to account for your other financial changes and reach your goals faster.
The Power Of Compounding
While the power of compounding in your invested amount is not to be underestimated, neither should the amount invested itself. A step-up of 5% in your SIP amount every year can prove substantial: a monthly SIP amount of Rs. 5,000 grows into a contribution of Rs. 7,033 at the end of the 8th year, and Rs. 9,893 in the 15th year.
Of course, many Mutual Fund houses offer you a provision where you can cap the increase to a point if you so wish.
Evaluating A Mutual Fund
A SIP step-up also offers a niche opportunity of allowing you to evaluate a Mutual Fund you are on the fence about. While equity Mutual Funds are generally long-term products, you may wish to commit greater amounts of money to those funds which have performed well in your portfolio, over others that may have lagged behind. You can do this during an evaluation of your Mutual Fund portfolio, which should usually be an annual exercise.
In all, a Mutual Fund step-up is a feature that will fit the needs of many regular Mutual Fund investors, and should ideally be a strong component of one’s financial planning in an equity Mutual Fund portfolio.
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