Systematic Investment Plans (SIPs) allow investors to invest a fixed amount regularly and build wealth gradually through compounding. Instead of relying on a large lump-sum investment, help create a sizeable corpus over a longer period through disciplined investing.
However, investors often face a dilemma when their income rises, or they have additional money available for investment: should they increase their existing SIP or start investing in another mutual fund? This question becomes particularly relevant for investors already investing a substantial amount, such as ₹25,000 a month.
When should you increase your SIP?
There are several circumstances in which increasing an existing could make more sense than adding another fund to your portfolio. Investors can consider the following factors before deciding:
- If your portfolio is already adequately diversified across equity, debt and other asset classes, you may consider directing additional income towards an existing SIP. However, make sure your investments remain diversified across sectors, market capitalisations, and asset classes in line with your financial goals.
- Investors with a relatively low risk tolerance may prefer to increase their allocation to a fund they already understand and are comfortable with, rather than adding another investment. Your risk profile should remain an important consideration when deciding whether to increase exposure to equity, debt or other instruments.
- Review how your mutual fund is performing against its benchmark and comparable funds. If a fund has consistently lagged its benchmark or peers, simply increasing the SIP may not be the best strategy. In such cases, exploring another fund could help align the portfolio more closely with your financial objectives.
Here’s an illustration of how increasing an SIP can affect the eventual corpus.
Investing ₹25,000 in a new fund
Monthly investment: ₹25,000
Investment period: 10 years
Total amount invested: ₹30 lakh
Expected annual return: 12%
Estimated returns: ₹26.01 lakh
Estimated maturity corpus: ₹56.01 lakh
Increasing your existing SIP
Monthly investment: ₹25,000
Annual SIP increase: 10%
Investment period: 10 years
Total amount invested: ₹47 lakh
Expected annual return: 12%
Estimated returns: ₹36,54,588
Estimated maturity corpus: ₹84,35,816
Note: These calculations are illustrative.
How much should you increase your SIP?
The appropriate SIP amount depends on several factors, including your income, financial objectives, investment horizon and risk tolerance. Inflation should also be considered when determining how much you need to invest for your future goals.
A fixed investment of ₹25,000 per month can result in a significantly larger corpus over 20 or 30 years than over a 10-year investment period. Investors receiving salary increments or experiencing an increase in income can either start a new SIP or use a SIP top-up facility to increase their existing investment.
Increasing investments gradually as income rises can help investors benefit more from compounding over a longer period. However, the decision should ultimately be based on whether the existing fund continues to align with the investor’s goals, risk profile, and overall portfolio strategy.