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Small increase, big difference

Raising your SIP amounts yearly can make a significant difference to your investment outcomes, both in terms of time and corpus


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Who doesn't like a raise in one's income? If you are an employee, you must have also eagerly waited for your annual appraisal. If you run a business, what's better than a hike in your margin?

A raise in income helps you in improving your standard of living and planning for stuff that you have always wanted. It's a recognition for a job well done and boosts your morale.

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Apart from these, a hike is also crucial because your money tends to lose value, even when it is sitting in your safe. That's because of inflation. The current rate of inflation is about 4-5 per cent. It means that, on aggregate, your income must increase so much so as to enable you to maintain the current standard of living.

However, while we have many items on our appraisals wishlist, one object is often overlooked: increasing you SIP amount. You may wonder what's the need. Increasing your SIPs with annual appraisals helps in two ways: it helps you accumulate more than your initial target and it helps you bridge any shortfall in your target amount.

Let's see the first case. Say, you want to accumulate Rs 1 crore and can do an SIP of Rs 20,000 per month. At 12 per cent, you will need 15 years to accomplish your goal. Now, say, you increase your yearly contributions by 10 per cent. It will now take you less than 13 years to accumulate Rs 1 crore.

Similarly, if you are accumulating Rs 20,000 monthly, in 30 years at 12 per cent, your final corpus will be Rs 7.06 crore. If you are also raising your yearly contributions by 10 per cent, your final corpus will be Rs 15.01 crore. That's the difference that little enhancements can make over the long term.

Attaining your goal before it's due doesn't just lead to fulfilment but also frees up capital for other goals that you may recognise at a later stage. All told, it never hurts to end up with more money than you intended. A larger corpus means a larger cushion. It can also guard you against an abrupt rise in inflation, which can make your initial assumptions invalid.

Let's come to the second case now. For many of us, it may happen that we don't have the necessary surplus needed for attaining a goal in a definite time period. Increasing your SIPs yearly in line with your annual appraisal helps such investors reduce the deficit. By aggressively increasing their SIPs, they can also remove the gap altogether.

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