Systematic Investment Plans (SIPs) are a popular way for investors to build long-term wealth through regular investments in mutual funds. But not many know that increasing the SIP amount every year can help create a significantly larger corpus over the long term. This strategy is known as a Step-Up SIP.
In a regular SIP, you invest the same amount every month. A Step-Up SIP, on the other hand, allows you to increase your monthly investment at regular intervals, generally by a fixed percentage or amount.
What Is A Step-Up SIP?
As your salary and income increase over time, your ability to invest can also improve. A Step-Up SIP allows you to gradually increase your investment, without putting pressure on your monthly budget.
For example, if you start with a Rs 10,000 monthly SIP and opt for a 10% annual step-up, your monthly investment would become Rs 11,000 in the second year and Rs 12,100 in the third year. The amount would continue increasing by 10% every year.
Assuming an average annual return of 12%, this strategy could potentially help a Rs 10,000 starting SIP grow to around Rs 1.86 crore after 20 years.
Over the 20-year period, the total amount invested would be approximately Rs 68.73 lakh, while the estimated gains could be around Rs 1.18 crore.
ALSO READ: Rs 1 Lakh Or Rs 10 Lakh: Which Financial Milestone Should You Target First​
How Does A Step-Up SIP Deliver Bigger Returns?
Consider an investor who puts Rs 10,000 every month for 20 years without increasing the contribution and earns an assumed annual return of 12%.
Monthly SIP: Rs 10,000 per month
Time period: 20 years
Interest rate: 12% per annum.
Total investment value: Rs 24 lakh
Estimated returns: Rs 75.91 lakh
Final Corpus: Rs 99.9 lakh
Now consider the same investor using a 10% annual Step-Up SIP. The monthly investment increases every year while the accumulated money continues to benefit from compounding.
Monthly SIP: Rs 10,000
Annual step-up: 10%
Investment period: 20 years
Assumed return: 12% per annum
Total investment: Around Rs 68.7 lakh
Estimated gains: Around Rs 1.18 crore
Final corpus: Around Rs 1.86 crore
Who Should Opt For A Step-Up SIP?
A Step-Up SIP can be useful for investors who expect their income to increase over time and want to gradually raise their investments. It may be particularly suitable for:
- Young professionals expecting salary increments every year
- Investors building a long-term retirement corpus
- Parents saving for their children's higher education
- People planning for major long-term financial goals
- Investors looking to increase investments to counter inflation
- Individuals who want to increase their equity mutual fund exposure gradually
Most importantly, investors must choose a step-up percentage that remains comfortable even when expenses rise.
ALSO READ: Rs 10,000 Monthly SIP? A 5% Step-Up Can Increase Your Retirement Corpus By Rs 83 Lakh
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.