Retirement planning involves accumulating a sizeable corpus to sustain expenses post-working years without compromising lifestyle. However, building such capital in a volatile environment poses challenges. This is where increasing mutual fund SIPs by only 5% yearly can make a meaningful difference owing to the power of compounding. Over long-term horizons of 20-30 years, even small SIP enhancement exponentially grows overall investible funds.
This aids in creating sufficient retirement pools through the dual engines of disciplined investing and intelligent use of compound interest by harnessing market-linked returns. In the section below, we’ll discuss how increasing mutual funds can benefit your retirement planning goal.
Benefits of SIPs for long-term investment
- Builds Wealth Through Compounding: Regular, disciplined investments into SIPs over extended timeframes allow harnessing the power of compounding to grow capital significantly. As the earned returns start earning returns themselves, even modest periodic investments can snowball into a large corpus through this exponential compounding effect.
- Mitigates Market Timing Risks: SIPs enable entering financial markets regularly at preset intervals in a phased manner rather than making lumpsum investments. This instills discipline and aids cost averaging benefits, reducing timing risks associated with volatile asset prices across market cycles.
- Encourages Investment Discipline: The fixed frequency and tenure commitments enforced by SIPs eliminate ad hoc investing practices driven by cognitive biases or emotions. This invests by design rather than intent, enforcing regular savings behaviour essential for long-term wealth creation goals.
- Offers Flexibility: SIP facilities are highly customisable, allowing the selection of periodic instalment amounts and frequencies as per an investor’s income flows and liquidity needs. This makes it adaptable across individual profiles with options to scale up or down investments.
Impact of Increasing Mutual Fund SIPs by 5%
Allocating investments across various financial instruments that can collectively target capital appreciation over long horizons aids retirement planning goals. Equity and equity-oriented hybrid mutual funds that deliver inflation-beating returns through economic cycles can fuel the growth engine. Simultaneously, debt and fixed-income options provide stability.
Within such plans, systematically enhancing SIP commitments by even 5% yearly activates the power of compounding to a greater extent. Consider monthly SIPs of ₹10,000 invested over 15 years in instruments yielding 10% average returns. Without any increase, the final corpus would be around ₹1 crore. However, just a 5% annual SIP increment ultimately results in nearly ₹1.6 crores or a 60% higher sum. Over the long term, minor systematic enhancements exponentially affect the collective maturity value. Hence, minor increases in commitments can aid significant wealth creation.
How Increasing SIPs Can Help Combat the Effects of Inflation
Rising inflation erodes the purchasing power of money over time. Therefore, savings instruments that can deliver returns exceeding inflationary pressures are crucial for preserving capital value. Equity-oriented options like growth-focused mutual funds historically yield ~12% annual returns over long investment horizons and can enable inflation-beating growth.
In such rising cost environments, systematically enhancing SIP commitments counterbalances inflated expenses. Even small 5% yearly increments in SIP amounts compound over long durations to grow investible sums faster. For instance, on a Rs 10,000 monthly SIP at 10% portfolio returns over 15 years, a 5% annual rise considerably improves the maturity corpus by over Rs 60 lakhs compared to a fixed SIP.
Therefore, dedicating investable surpluses towards mutual funds or equivalents that harness inflation-beating appreciation potential, coupled with minor yet consistent increases in SIP contributions, allows retail investors to negate inflated costs. This two-pronged approach aids capital creation in personalised increments despite external pressures.
How to Implement the 5% Increase Strategy
- Automation Tools- Many mutual funds and banker platforms nowadays provide auto-increment features for SIPs, allowing preset yearly instalments without manual intervention. Investors can avail of these to implement systematic enhancement.
- Define Increment Percentage- At the time of SIP registration, define the annual % increment, say 5%, which will automatically apply to the base amount annually on a specified date.
- Set and Forget Approach- The automation allows a set and forget approach once initial parameters of base SIP value and yearly hike percentages are configured. The periodic enhancements occur seamlessly in the background.
- Track Statement- Although the investing occurs on auto-pilot based on predefined logic, investors can still track fund statements periodically to evaluate corpus growth arising from the enhancement.
- Edit Parameters If Required – Based on changing income levels and liquidity positions, the SIP auto-increment parameters can be edited by updating instructions with the fund house or banker.
The Bottom Line
Systematic investment plans represent an efficient vehicle for long-horizon wealth creation, especially for pivotal goals like retirement. Embedding the discipline of preset frequency and amounts aids in prudently harnessing market-linked growth and compounding benefits over extended periods. Further, deploying even small, incremental enhancements such as 5% annual SIP rises substantially magnifies accrued maturity values.
Therefore, retail investors seeking capital appreciation outcomes tailored to counter inflation and fund future expenses may benefit from exploring SIP facilities with inbuilt escalators. Automation makes regular investing progression convenient.
