Insights

FundsIndia Explains: Step-up SIP

September 3, 2019 . Anirban Chakraborty

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”

-Warren Buffet

Systematic Investment Plans (SIPs) are a godsend for investors who don’t have the time or technical know-how. It’s a gateway for them to enter the market sans the added pressure of making tough decisions about the timing of buying/selling stocks, thanks to rupee cost averaging. What’s more, it holds you in good stead to beat inflation. This is because your wealth is not just being saved. It is growing at a rate that is potentially much higher than current inflation rates. In the long run, If you’re a disciplined investor in equity funds, you can be confident of sitting pretty atop a substantial corpus when it’s time to retire. 

However, a lot of investors take the concept of ‘passive investing’ to a whole new level. Their SIP amounts get set in stone for years together. While they would have been awarded appraisals and salary hikes over the years, their SIP is seldom extended a similar favour. 

What?

Step-up SIP, also called a ‘Top-up SIP’, is a handy solution through which your monthly contribution can be augmented by a predetermined fixed amount, or a fixed percentage, at recurrent intervals (half-yearly or annual) in line with your income level and financial goals. You can set sights on the final goal amount and work your way towards it, while gradually increasing your SIP amount. 

What are its advantages over your run-of-the-mill SIP, you ask? Well, the differences are quite stark. See for yourself!

Why?

Below is an analysis of 4 scenarios over a period of 10 and 20 years to depict how your investments would’ve grown in a step-up SIP as compared to a regular one:

  • An SIP of 10,000 with a yearly increment of 1,000 for 10 years (= 30.23 lakhs)
  • An SIP of 10,000 with no increment for 10 years (= 22.25 lakhs)
  • An SIP of 10,000 with a yearly increment of 1,000 for 20 years (= 1.46 crores)
  • An SIP of 10,000 with no increment for 20 years (= 91.38 lakhs)
Starting Investment (₹):10000
Increment Frequency:Yearly
Expected Return (%):12
Duration (in years):1020
Increment (₹):1000010000
Expected corpus (₹):30,23,42622,25,6191,46,39,34791,38,053

Pro Tip 1: We used our Step-up SIP calculator for this. You too could try it out here!

As you can see, with a modest increase in the investment amounts, there is a significant difference in its eventual valuation. Just opt for a Step-up SIP; in line with your present income, prospective yearly increments and your financial goals. Feel free to consult your advisor for the same. It’s always a good idea to have a strategic plan in place, to reach the desired amount over a particular time period. 

Summarising, here are the 3 main advantages of a Step-up SIP:

  • They are more in line with reality compared to regular SIPs since your investment contribution is being linked to your level of income. While your salary increases over time, it is not judicious to keep your SIP amount unchanged. 
  • It is a compulsory additional investment that you make periodically. Generally, when your income goes up, there is always a temptation to spend the extra cash. However, a step-up SIP enforces the discipline of higher investments each year, so you have no choice but getting to spend only the remaining amount. 
  • It enables you to focus your entire financial planning around a limited number of funds. Otherwise, each year you’d tend to keep adding new funds to your portfolio and over-diversify. This, in fact, does more harm than good, while also making your portfolio hard to track and manage. 

How?

Below are the steps you need to follow to set up your Step-up SIP with FundsIndia:

  1. Login to your account, and click on ‘Mutual funds’ on the left navigation pane
  2. Select ‘Systematic Plans’ → ‘Step-up SIP’ 
  3. Enter all the details and you’re done!

Pro Tip 2: You also have the option of entering a ‘Final SIP amount’, and after it is attained, increments will be stopped automatically.

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