Dhirendra Kumar's explains step-up SIPs and how they can be helpful to investors
First of all, tell us what is a step-up SIP?
Step up SIP, you know, everybody thinks of investment in terms of a constant and I come across a lot of people who don't want to save, and if I have to challenge them or encourage them or force them somehow - once in a while I'm able to force some youngsters to do that, then they actually come back with lot of descent, and they say that, I also do SIP of Rs 1,500 as if they're doing some big thing. But that is a big thing, because if somebody is able to find any money to save, and put it to work by way of investment, that's a big thing. So I'm not saying that it's a bad thing. But everybody thinks of savings as a constant. But the right way to save is that before you start spending, budget your spending and whatever you earn, invest the amount that you are likely to - your budgeted savings, and that money if you invest, then you are unlikely to go haywire with your plans. Because when money is lying in your bank account, there is always a temptation. And it is not necessarily an unnecessary expenditure or it is a casual thing, it is not an impulsive saving we simply have more needs. And there is just too much supply of goods and services and many things that you can't resist. So when you take money off your account, that gets to work, and if somehow it gets to work, so that's a systematic investment plan (SIP).
But SIP is not good enough, and why it is not good enough is because you are going to live longer, the only guarantee against your financial insecurity, when you will not have earnings is to have more than enough, then have not literally more than enough, but not more than enough simply because your career might get shorter.
At least the knowledge workers, of course, if you work on your farm, then unlikely because you need to grow food and you need to do farming, but for most of the people, we actually go to offices at 9:30 in the morning and they ride the metro, all the knowledge workers - everybody's career can get shorter, and a lot of things are getting automated. Have more, have little more, have as much as you can without compromising on the current living and that is the route to step-up SIP. Increase your SIPs over time and implement it.
So, what should be the plan to step-up SIPs?
So, the step-up SIP what every fund company is attempting or everybody claims or everybody encourages you to do is that at least increase your savings or investment by way of SIP by a certain percentage, which you decide, and it will be automated. So, if you start with Rs 1,000 this year, after 12 months, if you do a step up of 10 per cent, next year, the deduction or debit, you are giving a debit mandate when you do set up an SIP, next year it will be Rs 1,100. The year after that it will be Rs 110 added to it, which will be around Rs 1,210. Likewise, you keep increasing it by 10 per cent.
But I think that is good enough. But I think the right way of doing it is a little different. Every year you start afresh and okay, last year, I was earning Rs 50,000 a month. And this year I'm earning Rs 60,000 a month. So the 20 per cent increase but you don't increase the SIP by 20 per cent. It should be dependent on your projected budgeted annual expenditure.
Because it could be less, it could be more, but you decided that year that okay, this year, my car loan is over. So I can save Rs 10,000 more. This year my that loan is over or you have greater potential to save and your income has gone up. You take it to something like 25 per cent without much of a compromise. Don't automate it, because it is a thoughtful activity and it should be entirely dependent on budget. There could be a situation that you're a youngster getting started and you need more - you are getting married and you need to consume a part of your savings or investments. So things can change. And I think the advantage of doing this is you can do your annual investment review, you can do an annual step up of your investment. You will actually get time to think about an annual budget. And if you can do it, nothing like it. You will be a winner, you can retire early and you can live longer.
So can you please explain what it translates into? How does a step-up SIP help one reach their goal faster?
It's very simple, it's simply accelerated compounding. Accelerated in contribution. So, if you invest in Rs 1,000 and you earn 12 per cent, it takes you 20 years for it to become Rs 1 crore and if you do the same amount, but increase it by 10 per cent every year, you will achieve that in 16 years. If it takes four years, in a span of 20 years, that is taking you 20 per cent less time. So, you can either retire early or retire early and have that much more money. So, it can compound even faster. In fact, the remaining money will earn in subsequent years. Because if you have a crore of rupees indexed for another five-10 years, that crore rupee will also earn - so the magic of compounding gets accelerated in a larger magnitude.
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