Is incremental SIP beneficial?

Mutual funds today hold about 2.62 crore SIP (Systematic Investment Plan) accounts through which investors regularly invests. Assets Under Management (AUM) as on March 31, 2019 stood at Rs. 23,79,584 crores, according to Association of Mutual Funds in India (AMFI). The MF industry added about 9.13 lacs SIP accounts each month on an average during the FY 2018-19, with an average SIP size of about Rs. 3,070 per SIP account. Also, the total SIP contribution in FY 2018-19 stood at Rs. 92,693 crore, which is the highest till now as compared to Rs. 67,190 crores in FY 2017-18 and Rs. 43,921 crores in FY 2016-17. This indicates the awareness about SIP and its popularity among investors. That said, what is incremental SIP and how it can prove beneficial to you?

Incremental SIP, also known as step-up or growing SIP, is nothing but increasing the SIP amount periodically with a decided percentage. The period can be monthly, quarterly, semi-annually, annually or even bi-annually. However, doing it annually is the most preferred way of implementing incremental SIP. Say you have started a SIP of Rs. 10,000 per month for the goal which is 10 years away from now. You have decided to implement incremental SIP by increasing SIP by 10 per cent every year. Doing so would either reduce the tenure of accumulation or if you continue doing so till needed you may probably have more amount than that required.

Pros

1. Investing with incremental SIP setup helps you achieve your financial goals early than anticipated.
2. If you continue with the incremental SIP till you goal year, then probably you will have more amount in your hands than required.
3. Incremental SIP will take care of any moderate correction that happens in market.
4. Advantage of rupee cost averaging in incremental way. This means say NAV of a fund falls due to market correction and if you continue with the normal SIP then you would be able accumulate x number of units for that NAV. However, with incremental SIP you would be able to buy more units than the x number of units.

Cons

1. With incremental SIP there is a possibility that you would incur an opportunity cost. This means that, may be the extra amount that you are putting in incremental SIP would have been used to achieve other goals.
2. Like with incremental SIP buys more units when the market corrects, but when the market rises, they would probably buy more units at higher NAV as well.

Should you do incremental SIP?

Yes, surely you should opt for incremental SIP, but only in cases where you have less time left to achieve the goal or you have other needs provisioned. Though doing incremental SIP would be beneficial for you as you would be able to accumulate more amount than required or can achieve targeted amount early. However, while opting incremental SIP you also need to consider your cashflows. If your cashflows permit you to invest those extra bucks then surely go ahead with it.