How to Use Step-Up SIP to Reach Your Financial Goals Faster?

What Is A Step-Up Sip?

When you invest in mutual funds via a Systematic Investment Plan, you essentially contribute a fixed amount at regular intervals in a scheme. In a simple SIP, this amount does not change, so if you start with Rs. 5,000 per month, it’ll stay Rs. 5,000 for the entire tenure. But suppose you choose the Step-Up SIP option. In that case, you get the flexibility to increase your SIP amount automatically at regular intervals, like every year or quarter. This way, your investments can keep up with your growing income and help you achieve your financial goals faster.

How Does A Step-Up Sip Work?

This facility, also referred to as the top-up option, can be selected when starting a new SIP. Once selected, you'll need to specify some extra details along with your usual SIP setup.

These include:

Step-Up Amount or Percentage: This refers to the extra amount you want to add each time your SIP increases. This can be done by either selecting fixed amounts, like increasing SIP by Rs. 1,000 or Rs. 2,000 each year, or by choosing a percentage increase, for example, increasing your SIP by 10% or 5% every year.

Step-Up Frequency: Here you select how often you want to apply the increment to your Step-Up SIP. Most investors choose to increase their contribution amount on a yearly basis.

Maximum Limit: You don’t have to put a cap on the maximum contribution amount, but you have this optional facility that can be used to stop the increments once you reach your desired limit. This is particularly helpful for percentage-based step-up SIPs.

Here’s how these increments happen. Suppose you’re considering starting a Rs. 6,000 per month investment, but your sip investment planner recommends adding a 10% step-up. This means your SIP amount will go up by 10% of the previous year’s amount. So over the course of 5 years, your contributions will look like this:

First Year: Rs. 6,000 per month

Second Year: Rs. 6,600 per month

Third Year: Rs. 7,260 per month

Fourth Year: Rs. 7,986 per month

Fifth Year: Rs. 8,784.60 per month

Similarly, if you select a fixed amount increment, like Rs. 1,000 every year, your SIP will be Rs. 6,000 during the first year, Rs. 7,000 in the second, and so on.

How Can Step-Up SIP Help You Achieve Goals Faster?

If you want to retire early or realise your financial dreams faster, you should know that a Step-Up SIP can give you a huge boost. How? Let’s take a look at an example:

Raj and Rekha both decide to start investing Rs. 10,000 per month in the same equity fund, with an expected return of 12% per annum. While Raj goes with a regular SIP, Rekha selects a Step-Up SIP where her instalment amount increases by 5% every year. Their beginnings are similar, but let’s see how their corpus would look at the end of 20 years.

Regular SIP

Investment Amount: Rs. 10,000 per month

Expected Rate of Return per year: 12%

Investment Period: 20 years

Total invested amount: Rs. 10,000 * 12* 20 = Rs. 24,00,000

Returns at 12% per annum: Rs. 75,91,479.19

Total wealth = Rs. 24,00,000 + Rs. 75,91,479.19 = Rs. 99,91,479.19

Raj can accumulate approximately Rs. 1 crore with disciplined investing over 20 years!

Step-Up SIP

Investment Amount: Rs. 10,000 per month

Expected Rate of Return per year: 12%

Investment Period: 20 years

Step-Up: 5% per year

Total invested amount: Rs. 39,67,914

Returns at 12% per annum: Rs. 97,69,709

Total wealth = Rs. 39,67,914 + Rs. 97,69,709 = Rs. 1,37,37,623

With a small top-up every year, Rekha invested a higher amount than Raj, but she also earned over Rs. 37 lakhs more than him! If both Raj and Rekha were aiming to build a corpus of Rs. 1 crore, Rekha would reach that goal much faster too, in just 18 years! All thanks to her Step-Up SIP.

You can use online sip investment planner calculators to play around with different parameters i.e., your monthly amount, step-up percentage, and frequency, to see how they impact your investment.

Things To Consider

It's important to ensure that this year on year increment is realistic and manageable. If you select an ambitious step-up percentage, say 12% or 14%, you run the risk of stretching your monthly budget too thin in the future. For example, if an individual's salary hike per year is 6%, trying to increase SIP by 10% every year can be quite difficult to sustain. Not to mention, higher inflation and cost of living will also strain the budget. That’s why it’s crucial to align your Step-Up SIP with your income growth and initial amount. The best sip planner can help you make the most of your mutual fund investments. Certified professionals can assess your financial and risk profiles and recommend plans suited to your unique situation.