Most of us begin to invest through a Systematic Investment Plan (SIP) feeling quite assured that so long as we are putting money into the plan each month, our wealth will automatically grow.
A fixed monthly contribution is also an easy way to think about investing because it’s a “set-it-and-forget-it” type of commitment for which there is no need to think about what you are doing. However, with time, as your income increases, your spending changes and your other financial priorities evolve, your SIP usually does not change at all.
And while it may seem innocent enough, that lack of change can slowly and quietly slow down the compounding that you are relying on to help build your wealth. The majority of investors have no idea just how much of a significant impact this small behaviour has had on their long term wealth.
A flat SIP is weaker than you think
When a SIP does not increase over time, it can never keep pace with an increasing income and expense. Even though your income has increased, the SIP remains unchanged.
As a result, every year, you are able to save a smaller percentage of your income and the compounding effect will be less effective.
Eventually, this silently drains a large amount of money from what could potentially be your future wealth. A flat SIP “works,” however, it can leave lakhs of rupees in the form of lost opportunity.
The power of a 10% annual increase in your monthly SIP
Let’s take for example that you are investing Rs. 10,000 every month through an SIP. However, most people will continue to invest this amount every month for the entire duration of the SIP. That is where you are missing out!
Instead, if you have a 10% increase in investment each year (i.e., Rs. 11,000 the next year and so on), then over 20 years, at 12% returns:
- Rs. 99 lakh – flat SIP
- Rs. 1.5 crores – SIP with a 10% annual increase
Thus, there is approximately a Rs. 51 lakh difference between these two options.
Increasing the investment by small increments consistently will cause more rapid growth of wealth due to the effects of compounding. However, this can be done without changing one’s lifestyle or increasing investment risk. This is the consistent behaviour that creates a large difference in wealth over time.
The 10% Rule is easy to follow, regardless of income level
Many people believe that the 10% rule is only for high-income individuals to increase their SIP investments every year. In fact, a small SIP investment can be followed using the 10% rule.
Here is an example of how to apply the 10% rule on a SIP investment:
- SIP Year 1: ₹10,000
- SIP Year 2: ₹11,000 (a 10% increase from the previous year)
- SIP Year 3: ₹12,100 (an additional 10% increase from the second year)
While these SIP increases may seem minimal in comparison to an annual rent increase, a mobile phone bill, or an occasional luxury item, these increases have a dramatic impact on your long-term wealth when applied consistently. It’s simply a habit that you can start with little or no money.
Growth matters more than the starting amount
Most people think they need to start out investing a lot of money for their SIP, but what really matters is steady growth. If you start with a low SIP amount, it is not necessarily bad; however, you are making an error by keeping your SIP’s value level the same or lower as your salary increases.
SIPs should grow as your salary does. A growing SIP consistently has your investments in sync with your lifestyle and gives compounding the best opportunity to make modest beginnings into a significant fortune.
For example, a ₹10,000 monthly SIP increased by 10% each year grows to ₹33,100 in year 10 — small yearly bumps that add up big over time.
The long-term wake-up call
SIPs are a great way to invest money. But if you don’t increase the investment every year then you are quietly losing 50 lakhs of rupees (as per our example above), depending on how much you were investing initially and what your returns have been.
At first you will not notice the loss of money. It will take 15-20 years before you realise that you did not reach your full potential for money as an investor.
It’s a simple bad habit that could help you achieve great success with your investments, and all you need to do is start increasing the amount of money you invest each year.
How to make it work for you
Fixing this issue is easy. Increase your monthly SIP by at least 10% each year (or at least match the growth of your salary) and increase it slightly every month. The small changes will add up big time as the years go on. Using automation can help too. Just treat it as a non-negotiable expense, much like paying rent and utilities.
Each year, review your investment performance to see if your income has increased faster than expected and make adjustments accordingly. As long as you make SIP increases a part of your routine, you give your compounding interest the fuel needed to quietly and steadily build a substantial amount of wealth.
Setting up a SIP is the first of many steps to building wealth. The actual wealth will be in your investments growing alongside. A fixed SIP may feel safe, but it quietly limits your potential.
Increasing your SIP every year (even as little as 10%) will allow for compounding to have its greatest impact, creating a small amount of money today, becoming significant amounts of money over time.
The wake-up call is simple: If your SIP is not increasing, neither is your money.
Disclaimer:
This article is for informational purposes only and does not constitute financial advice. Please consult a qualified professional before making investment decisions.