Step-Up SIP: What Is It and How Does It Work?

A Systematic Investment Plan (SIP) is a popular, safe, and affordable mode of investment in mutual funds. If you are accustomed to mutual fund investments, you may have heard of the term “Step-up SIP.” This is a certain type of SIP which lets you increase your SIP amount periodically.

Let’s learn how this can be a beneficial tool for your portfolio.

What is a Step-up SIP?

SIP is a facility where you can automatically invest a predefined sum on a regular basis in your chosen mutual fund. Step-up SIP, sometimes also goes by “top up SIP,” is one of the different types of SIPs.

Through step-up SIPs, you can increase your monthly investment amount at a fixed periodic interval. Hence, you can continue increasing your investment as your income grows over time.

How does a Step-up SIP Work? 

Let’s take a look at the following two methods of step-up SIP and how they work: 

• Percentage basis

You can choose to increase your investment amount by a fixed percentage every year. Let’s look at this example to understand how it works: 

Suppose you have started an SIP of Rs. 3000 in the first year and want to increase your investment amount by 10% each year. So, for the second year, your investment will be Rs. 3300 (Rs. 3000 + 10% of 3000). For the third year, your SIP instalment will be Rs. 3630 (Rs. 3300 + 10% of 3300), and it will go on like this.

• Amount basis 

This works in a simpler way, and you can simply increase your SIP amount by adding a fixed amount to it on a yearly basis.

For example, suppose you start your SIP at Rs. 3000  per year and you decide to increase it by Rs. 2000 every year. So, next year, your SIP amount will be Rs. 5,000. In the third year, it will be Rs. 7,000, and it goes on like this.

What Are the Benefits of Step-up SIP? 

Step-up SIP has some significant advantages over traditional SIPs. Here are some of the benefits it holds:

• Invest in sync with your income: Keeping your investments in sync with your increasing income will help you ensure higher returns and, thus, a brighter future. Using Step-up SIP you can adjust your SIP amount with your income, keeping it at the same pace.
• Accumulate larger corpus: It is always advised to start your mutual fund investment with SIP, as it is an affordable and safer option. Moreover, starting early through SIP will earn you a good amount of return in the long run. Added to that, step-up SIP will increase your ROI by increasing your investment amount periodically.
• Save your investment from inflation: As inflation keeps rising, the value of money will keep depreciating. Accumulated returns on your investments will help you beat the increased price of goods and services with time.
• Grow a habit of savings: As your income grows, so should your investments. However, that is a rare case as most people do not increase their savings. Step-up SIPs make sure that a part of your increment reflects on your investments as well.

How does the Step-up SIP Calculator Work? 

Investment calculations can get really heavy and time-consuming. Also, manual calculations leave you with a chance of human error. The step-up SIP calculator is an online tool that will give instant, error-free results of your step-up SIP calculations.

Here are the steps on how you can use an step-up SIP calculator:

Step 1: Visit the official website of your mutual fund.

Step 2: Find and open the option of the step-up SIP calculator.

Step 3: Enter the monthly amount you want to invest in the mutual fund.

Step 4: Enter the expected rate of return (per year) for this mutual fund. If you don’t want to assume, you can also use past returns of the relevant benchmarks (indices). 

Step 5: Provide your mutual fund tenure.

Step 6: Enter Annual step up rate/amount. 

Step 7: Click on “Calculate” for the result.

As the calculation output, you will receive the following data: 

• Invested amount which is sum of all the SIP investments you made
• An approximate amount of gain you will generate from your investments
• Total value of your corpus once the fund matures 

Let’s clarify this process with an example: 

Suppose you have made an investment of Rs. 5000 and have set the step-up rate of 10% every year.

Hence, for the second year, your SIP amount will be Rs. 5500; in the third year, it will be Rs. 6050, and so on.

Now, here are your inputs:

• Monthly SIP amount: Rs. 5000
• Yearly step-up rate: 10%
• Anticipated return rate: 10% per annum
• Fund tenure: 10 years

You will get the following outputs: 

• Total investment amount: Rs. 9,56,245
• Approximate gains on your investments: Rs. 4,94,327
• Total amount at the maturity of your fund: Rs. 14,50,573

What is the Difference between Regular SIP and Step-up SIP? 

The primary difference between a regular SIP and a step-up SIP is that the monthly investment amount does not change in a regular SIP, But it increases periodically at a predefined rate/amount in case of a step-up SIP.

Total amount at the maturity is higher in step-up SIP. This is due to the simple rule of compounding. The increased SIP compounds over time and generate higher gains compared to the regular SIP.

An illustration might help you gain a better understanding: 

Suppose you invested Rs. 10,000 for a tenure of 10 years with an anticipated return rate of 10% for both step-up and regular SIP. Your step-up SIP is set at 10% on a fixed rupee basis. Now, let’s calculate for both SIP methods how much will be your ROI: 

Regular SIP: 

• Monthly SIP- Rs. 10,000
• Fund tenure- 10 years/ 120 months 
• Interest rate- 10% 
• Investment amount: Rs. 12,00,000
• Estimated return: Rs. 8,65,520
• Total Maturity Amount: Rs. 20,65,520

Step-up SIP: 

• Monthly SIP- Rs. 10,000
• Fund tenure- 10 years/ 120 months 
• Interest rate- 10% 
• Step-up rate per year: 10%
• Investment amount: Rs. 19,12,491
• Estimated return: Rs. 9,88,655
• Total Maturity Amount: Rs. 29,01,146

As you can see, the returns on investment through step-up SIP are higher by Rs.1,23,135 as compared to regular SIP. 

Things to Keep in Mind before Starting a Step-up SIP 

If you are considering step-up SIP as your investment mode, you might need to look at the following factors. These factors will determine your capital growth: 

• You need to decide on the mode of investment first, whether you will invest through an amount basis or a percentage basis.
• As SIPs are fruitful in the long run, you need to set financial goals. Also, it will be a continuous investment. So, check whether you will have the funds available.
• Finally, you should choose your SIP frequency carefully, whether you want to invest annually, semi-annually, quarterly or monthly. The higher the frequency of your investments, the higher will be the accumulated returns.

Final Word 

Step-up SIP is one of the most preferred investment modes for investors. It helps them maintain a disciplined investment structure for a healthy return on their investment. By facilitating an automatic increase in investments, step-up SIPs allow investors to benefit from the power of compounding and help them reach their life goals sooner.

FAQs about Step-up SIPs