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It is well-known that systematic investment plans (SIP) are one of the best ways to invest, especially for a passive investor. Through SIPs, investors can accumulate a significant corpus of funds over a long period without actively managing their investments. However, it is not as well-known that we can save a much higher amount over a long period by increasing our SIP amount every year. But you may ask, why is that the case? So, let us take a deep dive into this topic.
Additional Read: What is demat account
We all know that inflation erodes the value of money. What Rs. 100 can buy today, it may not be able to buy a year from now. If inflation is 5%, you will have to spend Rs. 105 a year from now to buy what you can buy with Rs. 100 today. Therefore, if you invest the same amount of money every month for a long period, it may so happen that its value will considerably diminish after considering inflation.
Suppose you start making an SIP of Rs 2,000 per month today. The value of Rs. 2,000 will diminish significantly over 10 years due to inflation. This is particularly true in the case of India where inflation tends to be much higher than that in developed economies like the US and Europe.
Retail inflation in India (based on the consumer price index) stood at 5.81% in 2024 as per the National Statistics Office. Such high inflation shows that you should increase your SIP mutual fund amount every year to protect against inflation.
Additional Read: Start Investing with Smart SIPs for Your Family’s Financial Future
SIP investments provide a significant return over a long period due to the power of compounding. As such investments generate returns, those returns are invested back. So essentially, an investor ends up earning returns on returns, along with earning returns on the principal amount.
As it is, SIPs help in earning returns due to the power of compounding. On top of it, investors can earn even more through compounding by increasing their SIP amount every year. By doing so, they can generate significant returns on the principal amounts, returns ploughed back into investments, and incremental SIP investments every year.
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There is no hard and fast rule when it comes to this aspect. If the inflation in a country is 5%, you can increase your SIP amount by 5% each year. By doing this, you will protect yourself against inflation.
That said, you should also consider your expected salary or income before increasing the SIP amount. Suppose you expect a 15% salary raise next year, then you can increase your SIP amount by much more than 5% if the inflation is 5%. This is assuming that your expenses will not increase at a higher rate than inflation. If you anticipate a one-time considerable expense next year, then you need to factor that too while increasing your SIP amount.
In simple words, you need to consider your expected salary, expected expenditure, and inflation before increasing the SIP amount. It may seem a bit complex when you read about it, but it is not that difficult to implement it.
You can estimate your expected salary next year by considering your employer’s performance. You can estimate average inflation by seeing how your expenses are increasing and by keeping abreast of economic news. If you still find it difficult, you can even consult a financial advisor. All said and done, increasing your SIP amount is a wise decision from the investment viewpoint.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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