Retail investors seek strategies to strengthen their corpus. One such method that has gained significant traction in recent years is step-up systematic investment plan (SIP). It is a dynamic and flexible way for individuals to grow their wealth over time, adapting to changing financial circumstances.
What is a step-up SIP?
A step-up SIP is a version of the traditional SIP. In a regular SIP, investors contribute a fixed amount at regular intervals, typically monthly, into mutual funds or other investment vehicles. Step-up SIP takes this concept further by allowing investors to increase their contribution amount at fixed intervals, usually annually.
“If a person starts an SIP of Rs 20,000 per month and invests for 20 years, she generates 11 per cent compound annual growth rate return on her investment. The final corpus will be Rs 1.74 crore on a total investment of Rs 48 lakh. Assuming, another person starts the same SIP but raises it by 10 per cent every year, the final corpus will be Rs 2.83 crore on investment of Rs 1.37 crore,” said Shrinivas Khanolkar, head – products, marketing & corporate communication at Mirae Asset Investment Managers (India).
“Step-up or top-up SIP is an important tool in any investor’s kitty as it allows them to increase their instalments in SIP by a fixed amount or percentage at predetermined intervals. This increase can be in line with their income growth. This helps investors reach their goal earlier than expected and create greater wealth over time, and also helps their annual savings stay aligned with inflation, maintaining balance between discipline and flexibility,” he said.
Shaily Gang, head-products at Tata Asset Management, explained how step-up SIP helps retail investors.
“An investor who takes to do step-up SIP, tends to create more wealth than normal SIP. Let us take the scenario of investing Rs 10,000 for 20 years as a flat amount vs investing with a 10 per cent rise in SIP amount every year. With equity market return assumption at 10 per cent, approximately 80 per cent more wealth would be created in absolute terms,” said Gang.
“Thus it is best to keep adding exposure to equity markets systematically and stay invested and for long periods.”
Starting step-up SIP?
Customers have to choose the step-up option when initiating a systematic investment plan (SIP) ??’ starting midway is usually not possible. Investors can cancel step-up and set up a new regular SIP. They also have the option to pause step-up SIP for up to three months.
Things to remember before starting a step up SIP Investment
Ensure a stable and growing income to accommodate increasing investments.
Step-up SIPs yield greater benefits over longer investment periods.
Align the step-up rates with your personal financial goals.
Be aware of the risks associated with your chosen investments.
Regularly review and adjust the plan based on any changes in your financial situation.
First Published: Sep 05 2024 | 11:11 AM IST
