For most of us, long-term investment often means investing in mutual funds, and you have likely subscribed to a Systematic Investment Plan (SIP), too. Who doesn’t want their investment to bring in high returns? So, how about a strategy that quickly helps you get about 38% higher returns on your investment?
Sounds like a marketing gimmick? No, it is not. Let us introduce Step Up SIPs, also known as Top Up SIPs, where you can periodically increase your monthly investment amount at a fixed rate. This way, you can boost your savings and returns over time without putting too much pressure on your budget.
What are SIPs, and how do they work?
SIPs are a convenient and disciplined mode of investing in mutual funds. These allow you to invest a fixed amount of money at regular intervals (weekly, monthly, quarterly, etc.) in your choice of mutual fund scheme. You can start a plan with as little as Rs. 500 per month and enjoy the benefits of rupee cost averaging, compounding, and diversification.
What are Step Up SIPs, and how do they work?
As the name suggests, it’s a strategy that takes SIP a step up, and it is done by increasing your monthly investment amount by a certain percentage or amount every year. If you think about it, as your income increases every year, so do your expenses. Then why not your savings?
Here’s how it looks in numbers: for example, if you start a SIP of Rs. 10,000 per month and increase it by 10% every year, your SIP amount will be Rs. 11,000 in the second year, Rs. 12,100 in the third year, and so on. You can choose the frequency and the rate of increase per your convenience and affordability. The final results are drastically different.
As of 2023 average, the growth rate of mutual funds was 19%. Considering that, let’s say, you start a regular SIP today for Rs 10000, in 10 years, you would have saved Rs 12 lakhs and would have got a return of Rs.35 lakhs, while on the other hand, if it would have been a step up SIP of with annual increase of 10%, you would have saved Rs 19 lakhs and the returns would have been 38% higher at Rs 49 lakhs.
| Normal SIP | |||||
| Year | Monthly investment | Amount Invested | Growth rate | Profit | Total Revenue |
| 1 | 10000 | 120000 | 19% | 13096 | 133096 |
| 2 | 10000 | 240000 | 19% | 53803 | 293803 |
| 3 | 10000 | 360000 | 19% | 127849 | 487849 |
| 4 | 10000 | 480000 | 19% | 242150 | 722150 |
| 5 | 10000 | 600000 | 19% | 405057 | 1005057 |
| 6 | 10000 | 720000 | 19% | 626654 | 1346654 |
| 7 | 10000 | 840000 | 19% | 919115 | 1759115 |
| 8 | 10000 | 960000 | 19% | 1297141 | 2257141 |
| 9 | 10000 | 1080000 | 19% | 1778483 | 2858483 |
| 10 | 10000 | 1200000 | 19% | 2384574 | 3584574 |
| Step Up SIP | |||||
| Year | Monthly investment (10% Step Up) | Amount Invested | Growth rate | Profit | Total Revenue |
| 1 | 10000 | 120000 | 19% | 13096 | 133096 |
| 2 | 11000 | 252000 | 19% | 55113 | 307113 |
| 3 | 12100 | 397200 | 19% | 134670 | 531870 |
| 4 | 13310 | 556920 | 19% | 262438 | 819358 |
| 5 | 14641 | 732612 | 19% | 451589 | 1184201 |
| 6 | 16105 | 925873 | 19% | 718344 | 1644218 |
| 7 | 17716 | 1138461 | 19% | 1082640 | 2221100 |
| 8 | 19487 | 1372307 | 19% | 1568930 | 2941236 |
| 9 | 21436 | 1629537 | 19% | 2207165 | 3836702 |
| 10 | 23579 | 1912491 | 19% | 3033973 | 4946464\ |
Overview of Systematic Investment Plans (SIPs)
For most of us, long-term investment often means investing in mutual funds, and many have subscribed to a Systematic Investment Plan (SIP). SIPs allow you to invest a fixed amount at regular intervals (weekly, monthly, or quarterly) into mutual funds, enabling rupee cost averaging and disciplined wealth creation with amounts starting as low as Rs.500.
Importance of Increasing Investment Contributions Over Time
As your income grows over the years, increasing your investment contributions ensures that your savings keep pace with your lifestyle and inflation. A static SIP may fall short of future goals, but stepping up your investments helps with beating inflation to get a better real return and harness the power of compounding.
What is a Step-Up SIP?
Definition and Concept
Step Up SIPs, also called Top Up SIPs, allow you to increase your monthly investment amount periodically by a fixed rate. Simply put, step up sip means consistently adding to your savings as your income grows.
Difference Between Regular SIP and Step-Up SIP
While regular SIPs maintain a constant investment amount, Step Up SIPs gradually raise your contribution, leading to greater corpus accumulation over time. For instance, in a regular SIP of 5 years, your contribution will remain constant. While in a step-up SIP, in the first year if it is Rs.1000, next year it will be Rs.1100, then another increase of 10% next year, and so on. This way, you’re able to compound your wealth much faster.
How Does a Step-Up SIP Work?
Mechanism of Incremental Investments
In a Step-Up SIP, you commit to increasing your SIP contribution by a fixed amount or a fixed percentage at regular intervals (usually annually). This means that while you start with a manageable monthly investment, you slowly scale it up as your income and savings potential grow.
Methods of Increasing Contributions
There are generally two methods to set your Step-Up SIP:
- Fixed Amount Step-Up:
You can choose to increase your SIP by a fixed sum every year. For example: Rs.10,000 per month in Year 1, Rs.11,000 in Year 2, Rs.12,000 in Year 3, and so on.
- Fixed Percentage Step-Up:
You can choose to increase your SIP amount by a certain percentage annually. For example: 10% incremental per month in Year 1, 15% incremental per month in Year 2, 20% incremental in Year 3, etc.
Frequency and Percentage of Increments
In a step-up SIP, increments usually occur once a year. On average, investors choose to increase their SIP contributions by 5% to 15% annually, depending on their salary growth and financial situation. Selecting the right increment is crucial, as it helps strike a balance between ambition and affordability, ensuring that the contributions remain sustainable without creating financial strain.
Example Scenario Illustrating Step-Up SIP
Let’s see how a Step-Up SIP works compared to a Regular SIP, assuming:
- Starting SIP: Rs.10,000 per month
- Step-Up: 10% annually
- Expected return: 12% p.a.
Suppose the SIP is for a five-year term. In that case, the total contribution will be as follows:
| Year | Regular SIP Monthly | Step-Up SIP Monthly (10%) | Regular SIP Total Investment | Step-Up SIP Total Investment |
| 1 | Rs.10,000 | Rs.10,000 | Rs.1,20,000 | Rs.1,20,000 |
| 2 | Rs.10,000 | Rs.11,000 | Rs.2,40,000 | Rs.2,52,000 |
| 3 | Rs.10,000 | Rs.12,100 | Rs.3,60,000 | Rs.3,96,000 |
| 4 | Rs.10,000 | Rs.13,310 | Rs.4,80,000 | Rs.5,55,720 |
| 5 | Rs.10,000 | Rs.14,641 | Rs.6,00,000 | Rs.7,32,312 |
Even though the Step-Up SIPs require just gradual increases, it created a larger investment pool, meaning higher future returns, faster achievement of goals, and better wealth building.
Calculating Returns with a Step-Up SIP
Introduction to Step-Up SIP Calculators
A Step-Up SIP calculator is an online tool that helps investors estimate how their investments will grow when they increase their SIP contributions periodically. Using a step up SIP calculator formula helps you accurately predict the future value of your investments by considering increments over time.
Formula Used in Step-Up SIP Calculations
The basic formula used is:
Future Value = P × {[(1 + r)^n – 1]/r} × (1 + r)
Where ‘P’ is the initial investment, ‘r’ is the rate of return per period, and ‘n’ is the total number of periods. Adjustments are made annually for step-ups.
Factors Influencing Returns in Step-Up SIPs
- Rate of Return
The annual return generated by your chosen mutual fund significantly impacts your wealth accumulation. Higher returns can dramatically amplify the compounding effect over time, growing your corpus faster.
- Step-Up Percentage
The percentage by which you increase your SIP each year plays a major role. A higher step-up percentage means larger investments over time, leading to greater wealth creation, provided it aligns with your income growth and affordability.
- Duration of Investment
The longer you stay invested, the more time your money gets to grow through compounding. A longer investment horizon magnifies the benefits of both your initial and incremental investments.
- Initial Investment Amount
Starting with a higher SIP amount lays a stronger base for future growth. Even if your step-up increments are modest, a larger starting point can accelerate the overall corpus buildup
What is the Difference Between Step Up SIP and Regular SIP?
| Aspect | Regular SIP | Step-Up SIP |
| Investment Amount | Fixed | Increases periodically |
| Flexibility | Limited | Higher (based on income growth) |
| Returns Potential | Moderate | Higher due to larger corpus |
| Inflation Handling | Less effective | Better at combating inflation |
| Effort Required | Minimal | Initial setup needed |
What are the benefits of Step Up SIPs?
Step Up SIPs offer several advantages over regular SIPs, such as:
- Higher returns: By increasing your SIP amount every year, you can accumulate more units of the fund and benefit from the power of compounding. This can significantly enhance your returns in the long term and help you beat inflation.
- Lower risk: By investing more when the market is low and less when the market is high, you can lower your average cost per unit and reduce your risk exposure. This can help smooth out market fluctuations and protect your portfolio from volatility.
- Greater flexibility: By choosing the frequency and the rate of increase of your SIP amount, you can customize your investment plan per your income growth and financial goals. You can modify or stop your Step Up SIP anytime without penalty or exit load.
- Better tax efficiency: By investing in equity mutual funds through Step Up SIPs, you can enjoy tax benefits under Section 80C of the Income Tax Act, 1961. The returns from equity mutual funds are also tax-free if you hold them for over a year.
Aligning Investments with Income Growth
As your salary increases, a Step Up SIP lets you match your growing financial capability.
Accelerated Wealth Accumulation
Higher contributions, thanks to step-up SIPs, significantly enhance your total corpus over time.
Mitigating Inflation Risk
Since expenses grow with inflation, so should your savings—step-up SIPs help you stay ahead.
Flexibility and Control Over Investments
You can choose how much and how often you want to increase your investments.
How to Set Up a Step-Up SIP
Choosing the Right Mutual Fund
Select funds aligned with your financial goals, risk appetite, and investment horizon.
Setting the Initial Investment Amount
Start with a comfortable monthly SIP amount that fits your current budget.
Deciding on the Increment Percentage and Frequency
Decide whether to step up by a fixed amount or a percentage (e.g., 10% annually).
Automating the Step-Up Process
Many platforms allow you to automate your step-up SIPs schedule, making the process seamless.
Monitoring and Adjusting Your SIP Over Time
Review your investments yearly and tweak the increment rate if necessary based on your financial situation.
Conclusion
Step Up SIPs are a smart and effective way to upgrade your investment strategy and achieve your financial goals. By periodically increasing your SIP amount, you can save, invest, and earn more without compromising your lifestyle or budget. Step Up SIPs can help you create wealth in the long run and secure your financial future. So, what are you waiting for? Start your Step Up SIP today and enjoy the benefits of compounding and rupee cost averaging. Happy investing!
Recap of the Benefits of Step-Up SIPs
Step-Up SIPs are an intelligent strategy to maximize returns, outpace inflation, and leverage income growth. By gradually increasing your contributions, you optimize wealth building without straining your finances.
How does Step Up SIP help you cope with inflation?
Step Up SIP helps you cope with inflation by increasing your investment amount every year, which means you can buy more units of the fund when the prices are low and benefit from the growth potential of the fund. This way, you can maintain your purchasing power and achieve your financial goals faster.
What are the drawbacks or risks of Step Up SIP?
Step Up SIP has some drawbacks or risks, such as:
You need to have a regular and growing income to support the increase in your SIP amount every year.
You need a long-term horizon and a high-risk appetite to invest in Step Up SIP, as the market may be volatile and unpredictable in the short term. You must choose a suitable mutual fund scheme and the right rate of increase for your Step Up SIP, as different schemes have different risk-return profiles and suitability for different investors.How can you stop or modify your Step Up SIP?
You can stop or modify your Step Up SIP by following these steps:
You can contact the mutual fund company or the intermediary platform through which you have started your Step Up SIP and submit a request to stop or modify your Step Up SIP. You may need to fill out a form or provide some documents for verification. You can also stop or alter your Step Up SIP online if the mutual fund company or the intermediary platform offers the option. You may need to log in to your account and make the changes you prefer.What is the ideal increment percentage for a Step-Up SIP?
An ideal increment is around 10% per year, balancing affordability and wealth growth.
Can I modify the increment percentage or frequency after starting a Step-Up SIP?
Yes, most platforms allow you to adjust the increment rate and frequency to match changes in your income or goals.
How does a Step-Up SIP differ from increasing my SIP manually?
Step-Up SIPs automate the increment process, removing the need to remember and manually increase it each year.
Are there any risks associated with Step-Up SIPs?
The primary risk is the need for consistent income growth to support higher contributions. Also, market volatility can impact short-term returns.
How can I track the performance of my Step-Up SIP?
You can track it using fund house apps, consolidated account statements, or a step up sip calculator to project and monitor growth.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.
