You get an annual raise on your salary, given the recurring inflation. In India, companies commonly offer increments ranging from 5-10%, depending on performance of the employee. With time, this increment adds to your salary, improving your lifestyle and having more disposable income.
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For example:
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If your initial salary is Rs 5 lakh per annum and grows to Rs 15 lakh after 10 years. It means you received an average increment of over 11% every year.
With increments, improving lifestyle is as necessary as ensuring that it also helps you create wealth over time. If you keep simply upgrading your life without saving for it, during retirement you may struggle with not having sufficient money to sustain your lifestyle.
That is why simply SIP in mutual funds is not enough. To keep up with their salary growth and protect finances from inflation, many people opt for step up SIP. It allows you to increase your SIP contribution (usually every year), in line with your income growth. For instance, a simple 5 or 10% annual SIP hike can significantly change your final corpus value over the long term, compared to investing the same amount.
Without Step-Up:
SIP amount: Rs 10,000
Investment duration: 25 years
Expected rate of return: 12%
Invested amount: Rs 30,00,000
Estimated returns: Rs 1,59,76,350
Total value: Rs 1,89,76,350
With 5% Step-Up:
Monthly amount: Rs 10,000
Step Up % (annual): 5%
Investment duration: 25 years
Expected rate of return: 12%
Invested amount: Rs 57,27,251
Estimated returns: Rs 2,16,20,609
Total value: Rs 2,73,47,860
With 10% Step-Up:
Monthly amount: Rs 10,000
Step Up % (annual): 10%
Investment duration: 25 years
Expected rate of return: 12%
Invested amount: Rs 1,18,01,647
Estimated returns: Rs 3,09,53,813
Total value: Rs 4,27,55,461
The math shows that if you have a long-term horizon, a simple 5 or 10% step-up can meaningfully add to your corpus. At 5%, you may end up with Rs 2.73 crore, while at 10%, you may build Rs 4.27 crore corpus. A longer investment duration also gives you time to spread market volatility and benefit from the power of compounding as mutual funds are considered very high risk investment options as their returns are not guaranteed.
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