%2011_07_24%20.jpg?im=FeatureCrop,algorithm=dnn,width=773,height=435 "Start With Rs 10,000, Build Rs 11 Crore: How A SIP Step-Up Can Supercharge Your Corpus")
Systematic investment plans (SIPs) have become a popular way to invest in mutual funds regularly and benefit from long-term compounding. Investors whose income increases over time can potentially accelerate their wealth creation by opting for a step-up SIP instead of keeping their monthly contribution fixed.
A conventional SIP involves investing a fixed amount at regular intervals, usually every month. A step-up SIP automatically increases the SIP amount by a predetermined percentage every year.
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This allows investors to gradually increase their investments as their income grows, without having to commit to a large amount from the beginning.
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SIP Vs Step-Up SIP: What Is The Difference?
Consider an investor putting Rs 5,000 every month into a SIP for 15 years. Assuming a 12% annual return, the total investment would be Rs 9 lakh, while the estimated corpus could be around Rs 25.22 lakh through the power of compounding.
Now, suppose the same investor starts with Rs 5,000 but increases the SIP by 10% every year. The total investment over 15 years would rise to about Rs 19.06 lakh, while the estimated corpus could reach around Rs 43.41 lakh at an assumed 12% annual return.
The difference comes from two factors: the investor puts more money into the market every year, and the additional investments also get more time to compound.
Rs 10,000 SIP With 10% Step-Up: How Much Can It Grow?
A step-up SIP can make a significant difference over three decades. For example, an investor starts with a Rs 10,000 monthly SIP and increases the contribution by 10% every year.
Assuming a 12% annual return and monthly compounding, the investment would look like this:
Starting monthly SIP: Rs 10,000
Annual step-up: 10%
Investment period: 32 years
Assumed return: 12% per annum
Total investment: Around Rs 2.41 crore
Estimated gains: Around Rs 9.30 crore
Estimated final corpus: Around Rs 11.71 crore
The annual increase also means the SIP amount becomes considerably larger over time. After 10 years, the monthly contribution would be around Rs 19.12 lakh, while after 20 years it would be around Rs 68.73 lakh. By the 30th year, the monthly SIP would be close to Rs 2.41 crore.
Who Should Consider A Step-Up SIP?
Step-up SIPs are ideal for young salaried professionals and investors whose income is expected to rise over the years. Instead of starting with a large monthly investment, they can begin with an amount that fits their current budget and increase it periodically.
It can also be useful for investors saving for long-term goals such as retirement, children's education or wealth creation. Those starting their investment journey later, -say in their 40s or 50s, may also consider increasing their contributions over time.
However, investors should not choose an annual step-up percentage that could become difficult to sustain. A contribution that is affordable today may become significantly larger after several years.
Benefits Of Step-Up SIP
A step-up SIP can help investors increase their savings alongside their income. It can also help prevent inflation from reducing the purchasing power of a fixed investment over the long term.
The biggest benefit is the larger compounding base created by increasing investments. However, the outcome depends on the return generated by the underlying mutual fund, and market-linked returns are not guaranteed.
Investors should therefore consider their risk appetite, investment horizon and financial goals before deciding the SIP amount and annual step-up percentage.
Disclaimer: This article is only for informational purpose. Readers are recommended to take advice of registered financial advisors for investment and trading decisions.
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