There are flexible options within SIPs, which allow you to increase your SIP contribution at pre-defined intervals. What this means is that you have the option to increase your SIP contribution over a period of time. This is nothing but an SIP booster, a facility that is provided by AMCs to investors in their funds. All you need is to give a one-time instruction to your AMC to increase the SIP investment in a particular fund that you are investing in by a predefined sum each passing year.
Let us see with an example of how this tools works over time. A and B are two investors who start an SIP in a fund with Rs 1,000 each month for the next five years. While A maintains the same amount of investment in the SIP for the entire tenure, B has opted for an SIP booster, by which investments go up by Rs 500 each month after completion of a year. So, in year 2, B has an SIP of Rs 1,500 and Rs 2,000in year 3, and so on.
Not only do you make additional investments without feeling the pinch too much, the combined benefit of increased SIP contribution, compounding and averaging does wonders to leave your with probably a much higher corpus at the end of your investment tenure than you imagined, when the additional Rs 500 each year increases to three times the original investment in year 5.
Why SIP for wealth creation
To create long-term wealth, a disciplined, far-sighted approach is critical, which is where investing in mutual funds through SIPs helps. Through SIPs your regularly invest a specific amount every month to buy units of a mutual fund. In doing so, you stand to benefit from:
- Averaging out the cost of investments
- Avoid the risks of timing the market
- Create wealth in a disciplined manner
You can also link your financial goals to investments through SIPs. For instance, at 35, you think it will be good to manage life in retirement when you are 60 with Rs 2 crore. To build Rs 2 Crore over the next 25 years, you will need to invest Rs 16,000 each month in an instrument which earns 10 per cent returns.
When you attach a real outcome to the purpose of your saving, you are far more likely to actually work towards that goal rather than saving blindly without an objective. There are reasons why you should stick to SIPs.
- SIPs inculcate the habits of regular saving
- An SIP can reduce the risk of lump sum equity purchases.
- Over a period of time, the benefit of compounding works better
- Equity investments do not attract long-term capital gains tax after a year
- Monthly SIP contributions starting with as less as Rs 500-Rs 1000
- Single ECS instruction is all that you need to start an SIP