The year was 2004. You had just finished your education and had taken up a nice job.

You met somebody who made you start a SIP. You were not too happy about it, but somehow you just started. This was in 2005. You filled up a form for Rs. 1500 per month, and sadly the SIP form was filled up for 2 years. You thought the amount was was too much, but you went through with it. In 2007 it stopped, and you did not do much about it.

It was in 2008 that you started another SIP because another person asked you to start a SIP. This was another ELSS and you did this SIP for a period of 3 years and in 2011 this SIP was also over. One day you went to that fund house (a friend was going so you went) and the girl at the counter said ‘you can withdraw it, the lock in period is over’. So you withdrew Rs. 44,652, and that got converted to a nice television in your house. Not that you needed the television, but suddenly when you found nice, tax free money lying in your account, you and your wife decided that the Television was an immediate necessity.

In 2012 one bank RM sold you a unit linked pension plan for which you are paying a premium of Rs. 4000 per month. He has said that if you pay for 20 years it will reach a few million rupees, but you are skeptical about the amount that it will really accumulate. Last week when you checked it had an amount of Rs.98,000/- – this set you wondering how your contribution of Rs. 120,000 had shrunk despite the market being at an all time high!

Well could this story have been different? Sure.

If you had started a SIP in an ELSS (you wanted a tax break, right) in 2005 for Rs. 1500 per month with A standing instruction that it should go up by 15% every year – (or you could have said Rs. 500 every 6 months!) – can you guess how much would have been the amount accumulated so far?

you have no clue, right? Compounding is always difficult to understand..lets ask Pattabhiraman (Pattu) and use his compounding calculator…

Assuming you started with a SIP of Rs. 1500 about 10 years ago with a 15% p.a. increase, and assuming that the market grew at a rate of 12% p.a. you would have a nice Rs. 9 lakhs sitting in your mutual fund account. NOT BAD AT ALL, RIGHT? 

So, here is the Modus Operandi:

Go start a SIP and sign up for an annual increase of 10% (or an absolute amount increase of say Rs. 1500 per month per year) and see the greater impact of the SIP. SIP amounts have to increase along with inflation and your own income going up. So if the inflation is 9% p.a. your SIP should increase by at least 12% p.a. so that at a later stage you can reduce the STRESS of not being able to save more…

Use the Calculator King’s around with the numbers and returns…and then decide which fund house, what amount, etc. and start a 40 year SIP…YOU can stop it when ever you wish to…

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  1. Dear Subra,
    I would like to thank you for the really beautiful article which I fit into perfectly, just like a mirror. I hope it does enlighten more people and I really appreciate you putting the link on FB.
    Thanks for the IT and other people like pattu , ashal…etc I made a course corrections though late but now am back on track.

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