Know Step-up SIP (a.k.a. Growing SIP or Top-up SIP)

We all know about SIP & its long-term benefits, but how many of us are aware of Step-up SIP (a.k.a. Growing SIP or Top-up SIP)?

Most of the investors continue with their existing SIP for years, even if their income has increased/manifold over a period of time. Basically, most people lack financial rebalancing and prefer the status quo. If you don’t focus on saving first, then by default you are spending. However, with the increase in income and therefore lifestyle up-gradation, you need to save (read invest) more on a year-on-year basis. SIP is one way to invest in mutual funds. Here, you invest a small sum at regular intervals as per your affordability. Whereas SIP provides automation in execution & convenience; simultaneously it works on rupee cost averaging & the power of compounding. Although the investment amount remains fixed with constant SIP unless you change it manually. 

However, it’s always better to opt for Step-up SIP. Just step it up by adding an automated feature that will increase your SIP contributions after a specific period of time usually after one year. With Step-up SIP, your monthly contribution increases every year by a predetermined fixed amount (say Rs. 500, 1000, 1500…) or by a fixed percentage (say 5%, 7.5%, 10%...) and you get a much higher corpus in the future in comparison with constant SIP. So basically, you are gradually increasing your SIP investment each year under auto mode without getting you involved emotionally.

Below is an analysis of 3 scenarios over a period of 20 years to depict how your investments would have grown in a Step-up SIP as compared to a Regular one:

Conclusion:

To summarize, there are various advantages of a Step-up SIP:

• Automatically increase SIP amount - This facility lets you enhance the SIP amount during regular intervals.
• Since your investment contribution is being linked to your level of income, Step-up SIP is more realistic with respect to change in lifestyle over a period of time.
• 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. 
• FastTrack investment journey - It enables you to achieve your financial goals much faster in less period of time, unlike regular SIP. 

As one can see, with a modest increase in the investment amounts, there is a significant difference in its Corpus. Last but not the least, investing in mutual funds via SIP over an extended period makes market timing irrelevant.

Disclaimer: Mutual Funds investment are subject to Market Risk