Systematic Investment Plan or SIP as we popularly know it, is a way of investing in mutual funds on a regular basis where the investments are automated. Most of the time people think their work is done as long as they are investing for their future through SIP. Guess what? It’s not. Investing a small amount for the future is good but will the same amount be enough for the future? Will it beat the inflation? Definitely no.
So, a SIP Step Up is necessary to fulfil goals faster, with a bigger corpus than planned and also get returns that counter inflation. What is Step Up SIP? Why should one do it and how is it done? Read on to know more.
SIP is a plan that helps investors make small investments regularly in mutual funds. And, SIP Step Up is a tool that allows investors to increase their investment in the mutual fund by a desired amount. SIP Step Up can be done quarterly, half-yearly or annually. This will help reaching one’s goal sooner than planned. Step Up amount should, generally, be equal to the average annual pay hike. 10% is suggested.
Below is an example of an SIP of Rs 5,000 done in Mirae Asset Emerging Bluechip Fund for a period of 15 years with and without a Step Up option.
By stepping up SIP by 10% annually, one can earn additional Rs 29L. Therefore, this helps in realising dreams early and easily.
Step Up SIP is a great way to turbo charge one’s investments. It’s definitely enough motivation for a person to work better if there is a yearly salary hike. Not just the salary, the investments need a hike too. This will help a person to not fall prey to lifestyle inflation. Step Up SIP is an excellent option where one can increase their investments annually by a certain percentage. This is more realistic as the investment contribution increases with the salary and comes with a lot of benefits.
Investing a fixed amount every month from the income earned will help reduce unnecessary expenses. Increasing this investment will help curb the tendency to spend more money with each salary hike. This leaves the person to spend only the residual amount.
Having a Step Up option for the current SIPs will help the person to focus the entire investing around a few funds. It’s good to have a diversified portfolio, but that doesn’t mean one can invest in more number of funds. That will lead to over diversification which will only increase the risk in the portfolio. Having a Step Up option will stop the investor in adding more funds to the portfolio. Having more funds in the portfolio makes it hard to track and manage the investments.
The main concept of investing comes with the motive of beating inflation. One should be able to earn a return more than the inflation. Even with the current investments one can earn good returns but the inflation reduces the purchasing power of the person and one might end up having lesser amount in hand while realizing the goal due to inflation. Inflation increases every year and what might seem a substantial amount today may not have the same value a couple of years later. Hence stepping up SIP every year will help one beat inflation and retain the purchasing power.
SIP and long-term investing is the best combination for wealth creation. This is because the money is compounded every year and gives higher return. Stepping up SIP only adds up to the power of compounding and leaves a bigger corpus than what was originally intended to fulfil the financial goals.
Step Up SIP also helps one realize their goals faster than they intended to. By increasing the contribution every year the amount for fulfilling the goal is reached faster and expected. This gives the investor more time and money to concentrate on other goals.
Does a SIP Step Up actually work? Will one earn bigger corpus? If yes, then how big? Let’s answer these questions with an example. 3 investors named A, B, and C start an SIP in a mutual fund of Rs 15,000 at the same time. A doesn’t choose a SIP Step Up option, B chooses to Step Up SIP yearly by 5% and C chooses to Step Up SIP by 10%. At the end of the investment tenure C has the highest maturity amount followed by B. With an annual Step Up of 10% and 5% respectively, C and B have accumulated 1.43 times and 1.19 times more wealth than A (who didn’t opt for a step up).
It’s similar to any regular SIP process. While starting investments in a Mutual Fund, an investor can choose the Step-up option. While completing the form, the investor is required to enter the initial amount, step-up amount, step-up frequency and the final amount. There is an option to put a cap on the maximum amount for monthly investments. For example, if an investor has started his/her SIPs with Rs 2,000 and wishes to step-up 10% annually and wants to have a cap on the maximum amount as Rs 5,000. So when the SIP amount reaches Rs 5,000 after 9 years or so, it will continue as a regular SIP and thereafter no annual Step Up is done.
Stepping up an ongoing SIP is not possible. Step Up option has to be opted for while starting a fresh investment only. Likewise, to opt-out of a step-up option, investor needs to cancel the ongoing SIP and start a new regular one.
A small decision of stepping up SIP annually can make a big difference in the final maturity amount earned. Setting realistic goals is very important. One cannot choose to Step Up SIP by 10% if their income hike is just 5%. An annual Step Up of 10% is considered ideal. One need not divert the entire hike in income towards SIP step up. If the hike in salary is 10%, one can consider 6-7% for the SIP step up. Even if there is no salary hike, one can still check if their current situation allows them for a step up. Lastly, one needs to practice patience with their investments. Only time can help one earn higher returns.
The author is the Founder and CEO at Upwardly.in