Every investor must acquaint himself with the idea of stepping up, especially when they are young. Your contributions towards your investments (be it SIPs or any other form) should be systematically increased every year.
Every investor must acquaint himself with the idea of stepping up, especially when they are young. Your contributions towards your investments (be it SIPs or any other form) should be systematically increased every year. This ensures that your investment matches your most recent realities in terms of income status, inflation rate, and investment objectives. Periodic step-ups can help you pledge higher amounts towards your investment goals, thus helping you achieve those goals in a more time-efficient manner.
Why is it necessary?
Let’s say that five years ago, your income was Rs 20,000. You managed to save Rs 5,000 per month, out of which you invested Rs 2,000. You picked a mutual fund SIP with an objective of creating a corpus of Rs 5 lakh in 10 years, with a CAGR expectation of 12%.
In five years, your corpus became Rs 1.65 lakh, still a long way away from your goal. By this time, your income had increased to Rs 40,000 and your monthly saving capacity to Rs 10,000. You decided to accelerate towards your goal by increasing your SIP to Rs 4,000.
With this additional investment, you achieved your corpus of Rs 5 lakh by the end of the ninth year, thus arriving at your goal with a year to spare. If you had simply continued through the tenure of 10 years, you would have overshot your target, and created a bigger corpus of Rs 6.29 lakh.
Stepping up is also important from the point of view of beating inflation. In the last 20 years, the average inflation rate has been 6.54%. The value of Rs 100 is comparable to Rs 29 in 1997. Therefore, the value of your investment objective should be seen also in the light of inflationary erosion. Assuming a similar inflation rate over the next 10 years, Rs 5 lakh in 10 years would be worth approximately half that amount today. It may therefore may not be enough to help you achieve your objective.
Stepping up your investments is key to long-term wealth creation. This is especially true of long-term money objectives such as creating a retirement fund. There are many ways to create it. Let’s consider two of them: one via a fixed investment plan, and the second via a step-up SIP.
How to step up
If you’re a mutual fund investor, you can provide your consent to your AMC or distributor to step up your SIPs by a fixed percentage every year. If you invest through other instruments, you may take stock of your investments periodically, and manually step them up.
The author is CEO, BankBazaar.com