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Although SIPs help you invest regularly, it does not mean you should keep the amount fixed over the entire tenure. As your income rises, your savings will also go up. Ideally, for a salaried person, the investment amount should increase every year in line with the increase in your income. The SIP allocation may not rise in the same proportion every year, but should at least follow the rise in income. If you get that much deserved 25% salary hike in a particular year, you should ideally divert a higher portion towards your SIP investments. This means you can target larger goals even though your current income does not allow big investments. For example, if you require a corpus of `25 lakh after 10 years with 12% returns, you would need to invest `11,000 every month, but if you increase the contribution by 10% each year, you would only need to invest `8,000 in the first year.
The step-up SIP can have a dramatic effect on your long-term savings. As the graphic shows, even a 10% increase in the SIP amount can give you a 45% bigger nest egg.
This is why the Provident Fund, which links the monthly contribution to the basic salary of the member, is such an effective tool for retirement savings.
There are other benefits from the step-up approach as well. One, you reach your goal faster if the amount you need is fixed. You may have targeted to save `20 lakh for your child's education in 10 years, but increasing the SIP amount would help you achieve it in just nine years. Besides, if you raise the SIP amount, it will prevent you from blowing away the money if your income goes up. "It will automatically prevent you from indulging in excessive spending.
The surplus savings need not be directed to an SIP in another scheme. Instead, one can simply increase the existing SIPs. Also, having separate SIPs for different goals does not mean that you invest in different funds.
For some financial goals, you may invest separately in the same set of equity funds. If you have 4-5 different goals, you can plan for them using the same set of equity funds. It is better to invest in a limited number of funds, instead of dealing with several funds at the same time.
The step-up SIP is a potent tool for new investors who don't have a very high income.
Many of them get intimidated by the huge savings required for certain goals like buying a house or retirement planning. Instead of losing heart, they should just start saving small amounts and then scale up as their income goes up.
Suppose you need to invest `10,000 a month for a certain goal. If your current income does not permit that right now, don't junk the plan altogether. Start with `5,000 now and gradually increase it by `500-1,000 a year as per your convenience. Of course, you might have to keep increasing the amount even after your monthly investment crosses `10,000 to account for the shortfall in the initial years. "A step-up approach can be used to gradually start moving towards your desired goal with whatever savings you have at the time.
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