You must have heard about staying invested in systematic investment plans in mutual funds. More Indians are attracted towards this market linked investment strategy in search for long-term wealth creation. With SIPs, many pieces of advice follow. Some suggest diversifying, some will tell you to buy on dips, others may focus on averaging via daily SIPs instead of monthly.
One popular advice that is far more common is to use the “step-up” technique. Most people who are into SIPs will suggest you to use this technique of raising your contribution in line with your income. This helps build a bigger corpus without putting too much pressure on your savings.
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But can you skip this method and still benefit if you have a long-term horizon? Can a simple Rs 3,000 monthly SIP, without any increase in investment, grow into Rs 1 crore? The answer depends on how long you stay invested and the returns your investments generate.
For Example:
SIP amount: Rs 3,000
Investment duration: 30 year
Expected rate of return: 12%
Invested amount: Rs 10,80,000
Estimated returns: Rs 95,09,741
Total value: Rs 1,05,89,741
Here, the calculation shows over 30 years, if your chosen mutual fund generates an average 12% annual returns, you can build a Rs 1.05 crore corpus. With an investment of Rs 10.8 lakh, you can earn Rs 95 lakh in returns just by being consistent. You must understand that mutual fund returns are never guaranteed. Broader market conditions, economy and other factors can erase any returns overnight. This is why it is recommended to always diversify across assets to project your portfolio from volatility.
If you have the patience for such a multi-decade investment horizon, considering “step-up” can always benefit your portfolio. A simple 10% step-up every year, starting with Rs 3,000, can boost your wealth by more than double.
Monthly amount: Rs 3,000
Step-up % (annual): 10%
Investment duration: 30 year
Expected rate of return: 12%
Invested amount: Rs 59,21,784
Estimated returns: Rs 2,05,80,585
Total value: Rs 2,65,02,370
Your total invested amount still stays just 22% of the corpus, while the remaining 78% comes from earning returns alone. Rs 1 crore corpus sounds like a solid investment plan but over 30 years, it can lose its value to inflation. In this regard, step-up technique will allow you to grow your savings while also ensuring that inflation doesn't eat away what you have built with years of patience.
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