Why You Should Increase SIP Amount With Increase in Your Salary

As you earn more, it is smart to put some of that extra money to work. One great way to do this is by increasing your SIP amount with an increase in your salary. This simple step helps you save more regularly and gives your money more time to grow with the power of compounding.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

  • Insurance Companies
  • Mutual Funds
Returns
Fund Name 3 Years 5 Years 10 Years
Top 200 Fund Tata AIA 23.15% 27.3%
19.47%
View Plan
Virtue II PNB Metlife 21.78% 23.76%
17.76%
View Plan
Pure Equity Birla Sun Life 18.83% 19.17%
16.34%
View Plan
Growth Opportunities Plus Fund Bharti AXA 17.85% 18.97%
15.65%
View Plan
Pure Stock Fund Bajaj Allianz 17.49% 18.39%
15.52%
View Plan
Blue Chip Fund HDFC Standard 14.09% 14.83%
12.85%
View Plan
Growth Super Fund Max Life 14.38% 15.26%
12.72%
View Plan
Multi Cap Growth Fund ICICI Prudential 15.63% 13.98%
12.51%
View Plan
Equity Fund SBI 14.73% 14.91%
12.42%
View Plan
Growth Plus Fund Canara HSBC Oriental Bank 12.78% 12.27%
10.7%
View Plan

Updated as of Jun 2024

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  Returns
Fund Name 5 Years 10 Years RSI
Active Fund QUANT 27.80% 23.96%
21.08%
Large and Mid Cap Fund QUANT 23.27% 22.69%
19.64%
Flexi Cap Fund PARAG PARIKH 23.90% 20.22%
20.15%
Large and Mid Cap Fund EDELWEISS 20.32% 18.01%
16.76%
Equity Opportunities Fund KOTAK 20.22% 18.98%
17.44%
Large and Midcap Fund MIRAE ASSET 21.11% 24.56%
23.01%
Flexi Cap Fund PGIM INDIA 21.48% -
15.13%
Flexi Cap Fund DSP 19.48% 17.73%
15.82%
Emerging Equities Fund CANARA ROBECO 18.91% 22.92%
20.84%
Focused fund SUNDARAM 18.22% 16.55%
15.16%

Updated as of June 2024

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What is SIP?

A Systematic Investment Plan (SIP) is like putting a little money into a piggy bank regularly. But instead of a piggy bank, it goes into mutual funds and market-linked funds. You decide how much and how often you want to put money in, like every month or every three months. It is a smart way to save and invest regularly without needing a lot of money upfront.

Ways to Increase SIP Amount with Increase in Salary

A salary increase is a perfect opportunity to boost your SIP (Systematic Investment Plan) contributions and grow your wealth faster. Following are some ways to leverage your raise for bigger SIP investments:

  1. Automate the Increase:

    Step-up SIP: Many market-linked fund platforms offer "Step-Up SIP" options. This allows you to automatically increase your SIP amount by a fixed percentage every year (e.g., 5% or 10%). This leverages the power of compounding and grows your investment significantly over time.

  2. Fixed Amount Increase:

    Budget Review: You should review your budget after the raise in your salary. Look for areas where you can cut back on unnecessary expenses. Allocate this extra money towards increasing your SIP amount.

  3. Percentage Increase:

    Target Increase: Decide on a specific percentage of your raise you want to dedicate to your SIP. This ensures a consistent increase in your investment and helps you reach your financial goals faster.

Why Should You Increase the SIP Amount with an Increase in Your Salary?

There are a couple of key reasons why increasing your SIP amount (Systematic Investment Plan) along with your salary hike is a smart financial move:

  1. Builds Discipline:

    • Prioritize saving over spending to cultivate disciplined financial habits.

    • Increase SIP allocation proportionally with any rise in income to maintain consistency and avoid complacency.

  2. Helps Beat Inflation:

    • Inflation erodes purchasing power, particularly in developing economies like India.

    • Annual SIP increases counteract inflation, aiding in goal attainment and safeguarding against rising expenses like education and healthcare.

  3. Surplus Corpus:

    • Overcoming initial investment reluctance and sustaining long-term commitment yields surplus funds beyond target goals.

    • Managing surplus funds effectively is crucial for maximizing financial potential.

  4. Power of Compounding:

    • Amplify compounding effects by increasing SIP contributions.

    • Earn returns not only on initial investments but also on accrued gains over time. 

  5. Discipline and Habit Building:

    • Boosting SIP reinforces disciplined saving habits, preventing lifestyle inflation.

    • Prioritizes long-term financial stability over short-term comforts. 

  6. Achieve Goals Faster:

    • Accelerate progress towards financial milestones such as retirement, education, or home ownership.

    • Bring dreams closer to reality by proactively increasing SIP contributions.

Illustration of Regular SIP and Increasing SIP 

Suppose an investor wants to invest in an investment fund through SIP with the following details: 

  • Tenure = 5 years

  • Estimated Annual Return = 12% p.a.

  • Initial Investment of Both Regular SIP and Increasing SIP = ₹5000 per month

  • Monthly Increase in Increasing SIP = ₹500 every month

Let us compare a regular SIP and an Increasing SIP:

Month Regular SIP (₹) Increasing SIP (₹) Estimated Returns (12% p.a.) Total Value - Regular SIP (₹) Total Value - Increasing SIP (₹)
1 5000 5000 0 5000 5000
2 5000 5500 600 10600 11060
3 5000 6000 1272 17272 18460
4 5000 6500 2032 24304 26760
5 5000 7000 2880 32184 36336

RESULT: By the end of the 5-year tenure, the total value of the investment in the Increasing SIP would be higher due to the increased contributions over time.

Introduction to Step-Up SIP

A Step-up SIP, also known as a Top-up SIP, is a type of Systematic Investment Plan (SIP) that allows you to automatically increase your investment amount periodically. This is a great way to align your investments with your growing income.

For example, let us say you start a Step-up SIP of Rs. 5,000 per month with a 10% annual step-up. Let us see what your investment would look like:

  • Year 1: Rs. 5,000 per month

  • Year 2: Rs. 5,500 per month (5,000 + 10% of 5,000)

  • Year 3: Rs. 6,050 per month (5,500 + 10% of 5,500)

Difference Between Regular SIP Vs Step-Up SIP

Aspect Regular SIP Top-Up SIP (Step-Up SIP)
Initial Amount Fixed amount invested regularly at set intervals Allows additional investments periodically
Flexibility Limited flexibility in increasing investment Offers flexibility to increase investment
Investment Fixed investment amount remains constant The investment amount can be increased anytime
Purpose Ideal for consistent, long-term investments Useful for boosting returns or savings goals
Risk Lower risk due to consistent investment pattern Slightly higher risk with variable top-ups
Volatility Lower volatility due to fixed investment amounts Potential for increased volatility

In Conclusion

Increasing your SIP (Systematic Investment Plan) amount along with increments in your salary is a prudent financial strategy. Aligning your SIP to your salary hike maximizes compounding benefits, guards against inflation, fosters discipline, and speeds up goal attainment. This proactive approach ensures that you capitalize on increased earning potential to build a stronger financial future.

FAQs

  • How much of the salary should be in SIP?

    There is no one answer to suit the needs of all or to find the ideal amount to invest in SIP. However, a good starting point is to aim for 15-30% of your salary towards savings and investments. You should consider your financial goals, as well as essential obligations, to decide your SIP investment amount.
  • What should be the increment percentage for SIP?

    SIPs are about consistency, so focus on a regular investment you can maintain. However, you can consider increasing your SIP amount over time, here's why:
    • Inflation: A steady increase helps your investments keep pace with rising prices.

    • Income growth: As your salary increases, you can allocate a larger portion towards investments.

    • Reaching goals faster: Increasing SIP amounts can help you achieve your financial goals sooner.

  • How do I get maximum benefit from SIP?

    Some tips to maximize your SIP benefits are as follows:
    • Start early: The power of compounding grows significantly over time.

    • Choose the right SIP: Pick a plan aligned with your risk tolerance and financial goals.

    • Stay disciplined: Do not skip SIP contributions unless absolutely necessary.

    • Review and rebalance: Regularly assess your portfolio and adjust SIPs if your goals or risk tolerance change.

  • What happens if I invest 10000 a month in SIP for 15 years?

    You can estimate the potential returns from SIP investment on the basis of historical averages and assumed interest rates. For example, with a monthly SIP of Rs. 10,000 for 15 years at a 12% annual return (hypothetical), you could accumulate a corpus of around Rs. 50.45 lakhs.

+For Mutual Fund midcap category Returns https://www.morningstar.in/tools/mutual-fund-category-performance.aspx & for Insurance midcap fund category Returns- https://www.morningstar.in/tools/insurance-fund-category-performance.aspx
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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