New Delhi: Investors putting Rs 25,000 a month into mutual funds often face a common question as their income rises: should they increase the existing SIP or start investing in another fund?
There is no single answer. The decision depends on the investor’s portfolio diversification, risk appetite, financial goals, investment horizon and the performance of the existing fund. In many cases, increasing an existing SIP can be a simpler and more effective way to deploy additional money, provided the portfolio is already adequately diversified.
A SIP allows investors to invest a fixed amount regularly rather than committing a large lump sum at once. Over long periods, the combination of regular investing and compounding can help build a substantial corpus. However, mutual fund returns are market-linked and actual outcomes can differ significantly from illustrations.
When increasing an existing SIP can make sense
If an investor already holds a reasonably diversified portfolio, adding more money to an existing suitable fund may be preferable to opening another scheme.
Diversification does not necessarily mean owning a large number of mutual funds. Instead, investors should examine whether their existing investments provide exposure across appropriate asset classes, market capitalisations and sectors according to their objectives and risk tolerance.
For example, an investor with suitable exposure to large-cap, mid-cap or other relevant categories may not need another fund simply because their monthly investment capacity has increased.
In such a situation, increasing the SIP can keep the portfolio easier to monitor while allowing additional savings to benefit from long-term compounding.
Risk appetite should guide the decision
Risk tolerance is another important factor.
An investor who is comfortable with the risk profile of an existing fund and believes it continues to fit their financial goals may choose to increase the SIP rather than introduce a new investment with a different risk profile.
However, investors should not automatically increase contributions simply because a fund has delivered strong recent returns.
Past performance does not guarantee future returns. Before increasing an SIP, investors should consider the fund’s investment strategy, portfolio composition, costs, risk level and consistency over an appropriate period.
When adding another fund may be better
There are situations where starting another investment can make more sense.
If an existing portfolio is concentrated in one category, sector or asset class, adding a suitably different fund may improve diversification. Similarly, if an existing fund has consistently underperformed its benchmark and relevant peers over an appropriate period, investors may need to reassess whether it remains suitable.
However, poor short-term performance alone should not automatically trigger a switch. Equity markets can go through periods when particular investment styles or categories lag behind others.
The decision should therefore be based on the original investment objective and the fund’s longer-term suitability rather than recent returns alone.
Rs 25,000 SIP versus increasing it by 10%
The difference can become substantial when the SIP is increased regularly.
Consider an illustrative scenario based on a 12% annual return assumption over 10 years.
If an investor continues with a Rs 25,000 monthly SIP for the entire period, the total investment would be Rs 30 lakh. At the assumed return, the estimated maturity value would be around Rs 56.01 lakh, including approximately Rs 26.01 lakh in estimated returns.
Now consider a second scenario in which the investor starts with Rs 25,000 per month but increases the SIP by 10% every year.
Over 10 years, the total amount invested would rise to around Rs 47 lakh. At the same illustrative 12% annual return, the estimated corpus would be approximately Rs 84.36 lakh, including estimated returns of about Rs 36.55 lakh.
| Strategy | Investment period | Total invested | Assumed return | Estimated corpus |
|---|---|---|---|---|
| Rs 25,000 fixed SIP | 10 years | Rs 30 lakh | 12% | Rs 56.01 lakh |
| 10% annual SIP increase | 10 years | ~Rs 47 lakh | 12% | ~Rs 84.36 lakh |
The difference is substantial, but it is important to understand why. The larger corpus is not simply the result of choosing an existing fund over a new fund. The investor is putting substantially more money into the market through the annual SIP increase.
The 12% return is only an illustration; it is not a guaranteed mutual fund return.
Income growth can support SIP increases
A practical way to increase SIP contributions is to link them to income growth.
For example, if an investor receives an annual salary increment, a portion of the additional income can be directed towards the existing SIP. This is commonly referred to as a step-up SIP.
The approach can help investors increase their investment rate gradually instead of making a large jump in monthly commitments.
For someone investing Rs 25,000 a month, a 10% annual increase would mean raising the monthly contribution to Rs 27,500 in the second year, Rs 30,250 in the third year and so on.
The investor should, however, ensure that the increased contribution remains affordable after accounting for essential expenses, emergency savings, insurance premiums and other financial commitments.
Inflation should not be ignored
The amount required to meet a financial goal several decades from now will be much higher than the amount needed today because of inflation.
This makes periodic increases in investments particularly relevant for long-term goals such as retirement, children’s education or building a large wealth corpus.
Keeping a Rs 25,000 SIP unchanged for 20 or 30 years could mean that the investment contribution becomes relatively small compared with rising income and expenses.
Increasing the SIP as earnings grow can help investors maintain a higher savings rate over time.
More funds do not automatically mean better diversification
Adding another mutual fund simply because additional money is available can sometimes make a portfolio unnecessarily complicated.
Multiple funds may hold many of the same stocks, resulting in overlapping exposure without providing meaningful additional diversification.
Investors should therefore examine their existing holdings before adding a new scheme. If two funds have substantially similar portfolios and investment objectives, splitting a larger SIP between them may not materially improve diversification.
The goal should be appropriate diversification, rather than owning the maximum possible number of funds.
A simple way to decide
Before increasing an existing SIP, investors can ask three questions.
First, is the current portfolio sufficiently diversified? If yes, increasing an existing suitable SIP may be reasonable.
Second, has the investor’s income increased? If additional income is available and financial commitments are under control, a step-up SIP can help increase long-term investment contributions.
Third, does the existing fund still fit the goal and risk profile? If the answer is yes, increasing the SIP can be considered. If not, the investor may need to reassess the portfolio before directing additional money into it.
If diversification is inadequate, adding a different fund or asset class may be more appropriate than simply increasing the existing SIP.
The bottom line
For someone investing Rs 25,000 every month, the decision should not be based simply on the number of funds held. The more important question is whether the existing portfolio is appropriately diversified and aligned with the investor’s goals and risk tolerance.
If the portfolio is already well structured and the existing investments remain suitable, increasing the SIP—particularly through annual step-ups as income rises—can be an efficient way to deploy additional savings.
If the portfolio is concentrated or the existing fund no longer fits the investor’s objectives, adding a carefully selected investment may make more sense.
Ultimately, the right strategy depends on the individual’s financial goals, time horizon, income, risk capacity and existing portfolio. The illustrated 12% return figures should be treated only as examples and not as expected or guaranteed returns.