Why to increase sip amount in your Mutual funds.

Do you want to increase the SIP amount for your mutual funds ? Or you want to keep it constant always ? A lot of people start with a SIP amount at first and then look forward to increase SIP amount later. This is a very common of every investor and its “how to increase sip amount”

Increase SIP amount

When we say “SIP”, it generally means constant SIP, which does not increase every year. When we calculate SIP amount using any SIP Calculator – the SIP value is generally very high and does not look realistic and at times and such high investment can trigger affordability issue. However there is a clear solution for this, which is used by financial planners and that’s called “Increasing SIP”, where one starts the SIP with a lower amount and then gradually increases them year on year. This looks more realistic as one’s income also increase overtime and ability to invest increases. We see this situation a lot while working with our clients under financial coaching program.

Let me show you the example : Ajay wanted to accumulate 5,00,00,000 (5 crores) for his retirement which is 25 yrs away. When he calculates the SIP amount, it’s coming around Rs 31,000 (assuming 12% returns from equity). Now it’s not possible for Ajay to invest Rs 31,000 every month, as it’s a very high amount. Rather he is fine if he can start with a small amount today and then increase it every year as his income would also increase with time. This is called as Increasing SIP model. If Ajay is ready to increase his SIPs by 10% every year, then he has to start with just Rs. 13,500. This amount is much more convenient for Ajay to arrange, rather than Rs 31,000 per month.

Should you increase SIP amount or not ?

At the first look, a general conclusion which comes into mind is that Increasing SIP is better than Constant SIP because it is much convenient and looks logical that investment should rise as the income increases. But there are different angles through which both the options can be looked at. Let’s look at two important points one by one.

1. Investment required in case of Increasing and Constant SIP

One of the most important factor one can judge both the situation is the amount of investment needed. If we take the above example we just discussed, one would need to start SIP of 31,000 per month to accumulate 5,00,00,000 in 25 yrs assuming 12% return. Now this amount will be constant throughout the all 25 yrs. Where as one can choose to start his SIP with Rs 13,500 and then increase it by 8% per year, but in this increasing SIP model, his SIP amount would reach 50,000 in 18th year and 85,000 in 25th year, which might look very big in numbers, but years from now, it would be worth a small amount considering the purchasing power of money and the annual income one earns. So don’t get surprised by numbers.

One should opt for increasing SIP, when his situation really does not allow him to invest a big amount and he is very sure that he would be able to increase his investments in tune with his salary increase. Truly speaking I am in favour of Constant SIP if one’s situation permits because that way you are investing more in the start of your life and that would help you keep your SIP in check later on in life. Imagine after many years in life, you have to just invest the same amount where as your Income has risen 3X. Isn’t it a big relief and freedom to do whatever you want from your money at that time. Imagine your salary is Rs 50,000 per month and you do SIP of 10,000 and even after 10 yrs, when your salary has risen to say 1.5 lacs per month and you are still doing SIP of Rs 10,000 only. I would choose to pay a little more today and then get into that kind of situation.

Most of the people who are not able to go for constant SIP, because of high SIP amount is because they are very late in investments and now their goals are near and they have less time for compounding. These people have high expenses already in life. Had they started long back when they started earning they could be in a better situation now. Below is the table which shows the Increasing and Constant SIP amounts required for the example discussed above and shows you the ratio of increasing and constant sip. You can see how it started with 44%, but rose to 203% later after 25 yrs.

Conclusion

One should start his SIP’s early so that he can keep his SIP’s constant through-out the tenure. If you are late, then your SIP amount will be very high and will look unrealistic and then you will have to increase your Systematic Investment plan (SIP) amount in future if you want to reach the goals.

2. How the corpus will grow in case of Increasing and Constant SIP

The other major thing to look is how your over all corpus would grow in both the cases. Note that in constant SIP and increasing SIP, the final corpus is getting accumulated and they reach the same point at end, but in case of Constant SIP, the overall Corpus is always higher than the increasing SIP and it’s because you are investing higher amount in the start and that way the compounding factor is in your favour. See the chart below which shows, how the gap between the two narrows down at the end of the tenure and both the cases lead to same corpus.

If you look at the table below, you will see that the maximum difference between the two is 36,00,000 in 17-18th year and after that the difference starts coming down (not so clear in table , you need to calculate it) . As you are starting with lower amounts in increasing SIP, the overall corpus is obviously going to be less, but it’s very much above 50% all the time, so if you are saving for long-term, you should be interested in the final corpus.

Note that the example and charts above are assuming a 25 yr old tenure and equity returns of 12%. The numbers would change depending on tenure and the equity return, but the overall conclusions discussed above remains same. For a shorter tenure like 4-5 yrs, the constant SIP and increasing SIP won’t differ a lot; it would be a small number.

So the conclusion is that one should keep on increasing their mutual funds SIP amount as and when they can , preferably every year. So are you ready to increase sip amount ?

Unified Payment Interface (UPI)

Unified Payment Interface (UPI), launched by National Payments Corporation of India has been gone live few months back. Several banks have already announced the launch of their UPI-enabled apps, which can be used by both customers of the respective banks or an account holder of another bank to transact payments.

Say, for example if I have installed the updated version of my HDFC Bank mobile app then from there I can add multiple bank accounts of mine - of all the banks which are now registered with UPI.

Here is how it works:

Steps for Registration:

Download the UPI app of your bank (or a third party app like PhonePe) from the Play Store. When you search UPI in Play Store, the list will show all registered banks' apps. Choose your bank"s app. Then install/update the app.

We all have been transferring money through NEFT/RTGS/IMP from long time. For that we used to require payee's bank account details like a/c no. and IFSC code. But with UPI to transfer money you don't require all those.

All you require is two things

(1) VPA  (Virtual Payment Address)

(2) MPIN

(1) Open the app and click on UPI icon there. Create UPI profile by entering details like name, answer to secret question etc. While creating UPI profile, it will ask you to choose your VPA. The format is always like below:

Your_chosen_VPA_Name@yourbank

For example my VPA is amisandip@hdfcbank

If the name you chosen for your VPA is not available then choose some other name which is available.

Go to “Add/Link/Manage Bank Account” option and links the banks and account numbers with your VPA.

(2) For registering or generating M-PIN:

Click on MPIN icon after you have successfully created your profile.

After you have entered last 6 digits of your debit card number and expiry month and year you will receive a One Time Password (OTP) from the issuer bank on your registered mobile number. 

Enter OTP and choose your preferred numeric MPIN and clicks on ‘submit’. Done.

How a UPI transaction is performed?

PUSH – Sending money using virtual address (VPA)

Log on to UPI application

After successful login, select the option of Send Money/Payment

Enter beneficiary’s/Payee virtual id (VPA) and amount and select your account to be debited.

You will get confirmation screen to review the payment details and clicks on ‘Confirm’.

Enter MPIN

Get ‘successful’ or ‘failure’ message.

So if you want to transfer me some money, all you need is my VPA - that's it.

PULL – Requesting money

Log in to the bank’s UPI application.

After successful login, select the option of collect money (request for payment)

Enter remitters/payer’s virtual id (VPA), amount and account to be credited i.e. your a/c no.

You will get confirmation screen to review the payment details and clicks on confirm.

The payer will get the notification on his mobile for request money.

Payer now clicks on the notification and opens his banks UPI app where he reviews payment request.

Payer then decides to click on accept or decline.

In case of accept payment, payer will enter his MPIN to authorise the transaction.

Payer gets ‘successful’ or ‘decline’ transaction notification.

Payee/requester gets notification and SMS from his bank for credit in his bank account.

And its done......

Regards,

Malay Shah

Closing your PPF after 5 yrs is possible now [NEW RULES]

Recently the PPF closure rules got changed and now a PPF account can be closed prematurely after 5 yrs itself, but only in some conditions which we will see in this article.

Till now, as per the old rules, the PPF account had a lock in period of 15 yrs, and in no case it was possible to close the account other than the death of the subscriber itself.

So death was the only valid reason to close the PPF account before 15 yrs maturity period.

PPF premature closure rules

As per the recent rule change by the govt, ppf closure before 15 years is now possible. You can close a PPF account if it’s at least 5 yrs old, in following 3 cases

Case #1 – Death

If the PPF holder dies, then the account can be closed anytime (even before 5 yrs) and the nominee/legal heirs can claim the amount from Govt.

Case #2 – Life Threatening illness

The PPF account can also be closed in case, the money is required for curing the serious ailment or a life threatening disease of following people

• PPF subscriber himself/herself
• Spouse
• Dependent Children
• Dependent Parents

Note that one has to provide the documentary evidence from a competent medical authority. So you will need to share the proof that you need to undergo some big treatment/surgery etc and you will need money for that.

Case #3 – Higher Education

If money is required for the higher education for the PPF subscriber or the minor on whose name the account is opened, then one can pre-close the PPF account. However one has to produce the fee bills and the proof of admission or any other documentary evidence.

Here are the exact notification wordings

Penalty of 1% when you close PPF account before maturity

This pre-close feature comes with a penalty of 1% of interest for each year. What it means is that for all the years since your PPF account is opened, you will get 1% less interest for each year. So if you earned 8.7% for a particular year, your calculation will be done @7.7% and this way for each period 1% will be reduced.

Govt has issued an example calculation for penalty of 1% . But the question now is does 1% penalty mean 1% less amount in final corpus after pre-closure?

No, the answer is 4.88% !

Yes, You get 4.88% less corpus due to this pre-closure penalty of 1% . But this is true for that example only which is given by govt in their notification. I went deeper and did the exact calculation and here are the results.

The reason why there is a good amount of difference is that there is the compounding of penalty in this example. If you check the balances in 3rd year, you will see there is difference of 2.1% . And it keeps on increasing as the number of years increase.

Which means, Older the PPF account, the higher is the final penalty for you.

It does not make a lot of sense to close the PPF account before maturity once 10 yrs is passed, as the penalty will be higher than 4-5% if most of the cases.

PPF pre-closure rule will help investors

PPF is one of the widely popular financial products in India. Majority of families have at least one PPF account and given it’s a long term product, there is a good amount of money lying in it. Now with this new pre-closure rule, an investor gets the benefit of closing the PPF account if they want to do it.

But the only issue is that it’s not an emergency solution to the problem as the documentation requirement is there and being a govt product, you can expect a slow response while closing down the PPF account and using the money.

Please share what do you feel about this new change in PPF closure rules?

Regards,
Malay Shah