![SIP provides consistency, but periodic adjustments can be very beneficial (representative image) SIP provides consistency, but periodic adjustments can be very beneficial (representative image)](https://images.news18.com/ibnlive/uploads/2021/07/1627283897_news18_logo-1200x800.jpg?impolicy=website&width=510&height=383)
SIP provides consistency, but periodic adjustments can be very beneficial (representative image)
Find out why actively adjusting your SIP is the cornerstone of a successful investment strategy.
SIPs are a popular investment tool for building long-term wealth. It provides discipline and consistency, allowing you to invest a fixed amount on a regular basis. But what happens if you set the SIP amount and forget about it? SIPs provide an avenue to build wealth over the long term, but in the face of two important factors – inflation and income growth – a static approach can be detrimental. Here's why actively tuning your SIP is the cornerstone of a successful investment strategy.
Inflation: Silent Erosion of Values
Inflation, which gradually increases the cost of living, poses a constant threat to purchasing power. Imagine that you can now invest in a specific basket of investments through SIPs. Over time, inflation causes you to need more money in the same basket. If your SIP amount stagnates, your investments will essentially fall in value due to inflation, reducing your ability to achieve your long-term goals. Strategically increasing your SIP contributions in line with inflation expectations can help you maintain purchasing power by increasing your investments along with your living expenses.
Growth as an Investment Opportunity
As your career progresses and your income increases, if you neglect to adjust your SIP, you will miss out on valuable investment opportunities. Maintaining a fixed SIP amount despite high income results in lower investment ratios. From a wealth management perspective, this is a missed opportunity to take advantage of compound interest. Compound interest is the magic formula that allows your earnings to generate additional profits over time. Increasing your SIP proportional to your income growth fuels the engine of compound interest, accelerating wealth accumulation and helping you achieve your financial goals faster.
achieve financial milestones
Many financial goals, such as retirement planning, children's education, or your dream home, involve certain expenses. Unfortunately, these costs are not free from inflation. A home you plan to buy in 10 years will likely cost a lot more by then. Regularly adjusting your SIP in line with inflation can help your investment corpus grow along with the target cost rise. This proactive approach will greatly increase your chances of comfortably achieving your financial goals.
Maximize the power of compound interest
Regular SIP growth reveals the true power of compound interest. Imagine a snowball rolling down a hill. The bigger your initial snowball (investment), the faster it grows with each roll (compound returns). Increasing your SIP contribution essentially adds more eyes to the ball, increasing your investment material exponentially in the long run. This snowball effect is especially impactful in the later stages of your investment journey and provides a significant boost to your overall wealth accumulation.
Market dynamics and strategic adjustments
Market conditions are dynamic, and a truly effective investment strategy requires flexibility. SIP provides consistency, but periodic adjustments can be very beneficial. For example, during market downturns, consider increasing your SIP to purchase more products at lower prices, potentially amplifying your long-term profits. Conversely, if the market reaches new highs, you can adjust your SIP amount to maintain your risk tolerance.
-The author is Shoonya, co-founder and MD of Finvasia. The views expressed are personal.