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In today’s time, financial independence and creating a big fund for retirement is the biggest dream of every businessman and professional. Generally, people start a Systematic Investment Plan (SIP) of a fixed amount in mutual funds and keep depositing the same fixed amount for years. However, considering the increasing rate of inflation and increasing salaries every year, ‘Step-Up SIP’ is proving to be the most accurate and powerful means of wealth creation as compared to normal SIP. A nominal annual increase of just 10% can make an additional difference of crores of rupees to your normal returns.
What is Step-Up SIP and how is it different from normal SIP?
In a normal SIP, the investor deposits a fixed amount (say ₹10,000) every month for the entire investment tenure. In contrast, in a step-up SIP (also called a top-up SIP), you instruct your fund house to automatically increase your monthly installment by a certain percentage (say 10%) or by a fixed amount (say ₹1,000) every year. As your salary, increment or business profits increase every financial year, increasing your investments in the same proportion naturally accelerates your savings potential and protects you from lifestyle inflation.
Understand mathematically: Difference between normal SIP vs step-up SIP
Suppose two friends, ‘Amit’ and ‘Rohit’, start investing in a mutual fund at the age of 25 with ₹10,000 per month for 20 years and both get an expected average CAGR return of 12% per annum.
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General SIP (Amit’s case):
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Monthly Investment: ₹10,000 (Fixed)
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Investment period: 20 years
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Total accumulated capital in 20 years: ₹24,00,000 (₹24 lakh)
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Total corpus after 20 years at 12%: Approx ₹99.91 lakh (about ₹ 1 crore)
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Step-Up SIP (Rohit’s case – 10% annual increase):
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Initial investment: ₹10,000 per month
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Annual Increase: 10% every year
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Total accumulated capital in 20 years: Approximately ₹68.70 lakh
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Total corpus after 20 years at 12%: Approx ₹2.30 crore (₹2,30,00,000)
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How to get extra profit of more than ₹1.30 crore?
It is clear from the above data that Rohit increased his monthly investment with salary increment by just 10% annually. As a result, while Amit got a fund of ₹1 crore after 20 years, Rohit’s total fund reached ₹2.30 crore. That means Rohit received a net additional corpus of more than ₹1.30 crore. This magical difference was possible only because the money raised in subsequent years multiplied rapidly in the top cycle of compounding.
Key Benefits of Step-up SIP
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Synchronization with salary increase: As your income increases, your savings share automatically increases in the same proportion.
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Ability to beat inflation: The purchasing power of fixed SIPs decreases over time, while step-up investments grow much faster than the inflation rate.
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Quick achievement of financial goals: Big financial goals like children’s higher education, a dream home or retirement at the age of 45-50 are accomplished years ahead of schedule.
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Financial Discipline: Top-up through auto-debit saves the investor from wasting money on unnecessary expenses.
How to start Step-up SIP?
If you are already running a SIP, you can activate the ‘Top-up/Step-up’ option in your existing SIP through your mutual fund portal, broker app or distributor. While starting a new SIP, directly choose the option of ‘Annual Step-Up’, setting the amount at 5%, 10% or as per your convenience. In case of financial crunch or change in job, most fund houses also have the facility to pause or modify the step-up feature. Starting on time and making little additional investments consistently is the simplest and safest formula for becoming financially rich.