Why you should increase mutual fund SIP amount every 1 year by 5-15%

Systematic Investment Plans (SIP) through mutual funds constitute a key instrument in wealth accumulation. The inherent power of SIPs lies in compounding, through which returns are made not only on the invested amount but also on the gains, as these are reinvested back into the fund. By investing regularly via an SIP, smaller investments gradually accumulate into a large sum over time, thus evoking the principle of compounding — the longer your money stays invested, the larger its growth. 

An effective strategy to maximize your wealth accumulation through an SIP is by incrementally increasing your SIP every year, aligned with the growth of your income. According to a report by FundsIndia, a monthly investment of Rs 5,000 with no annual increases, equates to a portfolio of Rs 49 lakh over a 20-year period, assuming a 12% return. However, if the SIP amount is increased by 5% per year, the portfolio would grow to Rs 68 lakh within the same 20-year span. With a 10% annual increment, the portfolio may appreciably double to Rs 98 lakh, while with a 15% annual increment, it may escalate to Rs 1.5 crore. This tremendous growth operates on the principle of annual percentage increase on the previous year’s SIP amount. For example, an initial Rs 5,000 SIP with a 10% annual increment would lead to a monthly investment of Rs 5,500 in the second year, Rs 6,050 in the third year, and so forth. 

Thus, yearly increments not only ensure a higher return, but also a growing portfolio value: an unchanged annual investment of Rs 5,000 over 30 years will result in a portfolio worth Rs 1.8 crore. However, with annual increments of 5%, 10%, and 15%, its corresponding value can snowball to Rs 2.6 crore, Rs 4.4 crore, and Rs 8.3 crore respectively. The key takeaway is that SIPs' systematic investment combined with a yearly increase in your SIP amount channels the power of compounding, leading to an exponential growth in the value of your portfolio over time.

It is advisable to invest in mutual funds through an SIP based on your risk-taking capabilities. If your risk-taking capacity is high, and the goal is not in the near term, you can consider mid and small-cap funds for potentially higher returns. If you are new to mutual funds or have low risk-taking capabilities, then you should invest in large-cap funds, as they allocate your money to blue-chip stocks. The key lies in periodically increasing the SIP amount to build your portfolio quickly.

Also read: Mutual fund SIPs for Rs 250 per month? Here's what Sebi chief Madhabi Buch says