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Diwali, the festival of lights, signifies hope and prosperity. As the vibrant lights of Diwali brighten our homes, one must look at the festive season as an opportunity to illuminate their financial future as well. Diwali is symbolic for the victory of knowledge over ignorance, and what better time than now to apply these principles to their finances as well. A Step-Up SIP is an intelligent and disciplined way of taking charge of one’s financial well-being and working towards their goals.
With SIPs (Systematic Investment Plans), investors can invest a fixed amount of sum at a predetermined frequency in a plan or scheme that best matches their financial goal and risk appetite. A Step-Up SIP is a variation to the traditional SIP approach wherein investors can incrementally increase their investment amount over time. The process can be automated, and investors can opt to gradually increase their regular SIPs by a certain percentage on an annual basis or a frequency of their choosing. For instance, an investor who invests Rs 5000 monthly in a particular scheme in 2023, chooses to increase the amount by 10% next year., and he/she may continue to do so till the time they are invested. This strategic approach helps align their investments with the income growth and financial goals, creating a well-defined, systematic, and disciplined plan of action.
Getting started
There isn’t a major mathematical algorithm that one needs to step-up their SIP investments. All investors need to do is assess their long-term goals. It could range anything from retirement planning to buying your dream home to saving up for higher education. Once the goal has been fixed, investors need to calculate how much money they would need at the end of the tenure. Based on this amount, the initial base investment and the suitable step-up percentage can be decided. It is imperative to note that this amount and percentage may vary depending on the investors expected growth in income and the end financial objective.
The next step is to select the right mutual fund, start the investment process, and get the Step-Up SIP protocol activated. Lastly, these investment strategies need to be monitored and adjusted basis the external macro environment and the dynamic changes in one’s portfolio.
Let us look at some of the key advantages that help Step-Up SIPs add a silver lining to the portfolio.
Adaptability and flexibility: Nothing in life can be predicted and things are constantly, evolving. A Step-Up SIP allows you to adapt your investments according to your financial capabilities. As your income rises, you can increase your SIP amount, ensuring that your investments keep pace with your earning potential.
Power of compounding: One of the most compelling reasons to start a SIP is the potential to compound money over time. By increasing your SIP amount periodically, investors are in a position to magnify the compounding effect, allowing investments to grow exponentially.
Goal-based investing: Your financial goals evolve over time. Whether it’s buying planning for travel, investing in luxuries, or planning for your retirement, a Step-Up SIP can be tailored to meet the investment objectives. One can align the SIP increments with specific milestones, ensuring that they are always on track to achieve their goals.
Rupee cost averaging: Investing regularly, especially through SIPs, enables you to benefit from rupee cost averaging. When you increase your SIP amount, you buy more units when the market is down and fewer units when the market is up, effectively lowering the average cost of your investments.
Beating inflation: Inflation erodes the purchasing power of money. The benefit of investing at a scheduled time is that an investor need not look at the volatility in the market. By increasing investments through Step Up SIPs, investors can combat the impact of inflation and secure their financial future effectively.
Just as the festival of lights brings joy and positivity into our lives, a well-structured SIP, especially one that incorporates the Step-Up feature, can bring financial stability and abundance. Investing in Step-Up SIPs has the potential to bring in a layer of consistency to achieving the financial goal. The idea is to start small, step up gradually, and witness your investments grow into a beacon of financial security and prosperity.
(The writer is CBO, Axis AMC)