Whenever people start planning their investments, a common fallacy I observe is, people want to become millionaires almost overnight. Think of it this way – you don’t simply get up one day and start running for a marathon! You need to gradually build up your pace and stamina. The analogy is quite similar when it comes to your investments as well. To build wealth, your investments need to steadily pace up.
While I have always advocated that the Mutual Funds should be your top choice, if your agenda is to build wealth, you should also focus on upgrading the SIP amount year on year.
How does this help you?
One of the biggest advantages of investing in a SIP is, the convenience that it offers you. A SIP essentially allows you to save a sum (weekly/monthly/quarterly) as per what we can afford. But with every annual bonus, hike or increment, our income does witness a gradual upward shift.
Therefore, by essentially topping up your existing SIPs by 5-7% every year, you will be capitalizing on the power of compounding and it will also help you reap higher returns. Additionally, you will be avoiding increased paperwork, as it will reduce the necessity of creating and tracking multiple stocks.
How can you go about it?
You can approach topping up your SIPs amount in 3 simple steps.
Choose the correct scheme
In case you are looking at SIP plans that enable you to enhance the amount regularly – ensure that it fits in with your risk profile. For example, if you are a moderate risk taker, you will look at a balanced fund, while an aggressive investor will opt for a mid-cap equity fund to suit his requirements.
Determine the frequency
When you opt for increasing your SIP at regular intervals, you can choose the frequency and the amount by which you want your SIP to step up. There are fund houses which allow a bi-annual uptick in your SIP amounts.
Identify your investment cap
Investors can put a cap on the maximum amount they wish to invest per month. This way your SIP would keep increasing until it hits the ceiling amount, post which it will act as a regular SIP with the same investment amount every month.
As I mentioned earlier increasing your SIP amount is a determined way to ensure that your marginal propensity to save is increasing. That is one of the keys to wealth creation in the long run and will help you to achieve your financial goals.
Rahul Jain, Head, Personal Wealth Advisory, Edelweiss