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Does a step-up SIP provide a higher return than an ordinary SIP?

Posted on 14 Jul 2024
Author: Sayan Sircar

Tags: Portfolio Construction

7 mins read
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This article explains how the return and corpus created vary between a step-up SIP and an ordinary fixed SIP.

Does a step-up SIP provide a higher return than an ordinary SIP?

📚 Topics covered:

What is a step-up SIP?
Does the step-up SIP create a larger portfolio than a normal fixed SIP?
What exactly happens inside the step-up SIP?

What is a step-up SIP?

SIP SWP and STP

All of these are standing instructions that get executed as per a schedule you specify:

Systematic Investment Plan (SIP): Money from a bank account is invested into a mutual fund, typically once a month
Systematic Transfer Plan (SIP): Units from a mutual fund are redeemed to invest in another mutual fund of the same AMC
Systematic Withdrawal Plan (SWP): This is the reverse of the SIP. You sell the units from a mutual fund to send money to a bank account

A SIP is an instruction to a mutual fund to deduct from your bank account, typically every month, to invest in a mutual fund. The amount invested stays the same every month.

A step-up SIP is one where the monthly amount invested increases, say by 5% or 10%, after a year every year until you stop the SIP.

You can see how the monthly amounts in a SIP and step-up SIP change like this:

Year	SIP	10% Step-up SIP
1	1,000	1,000
2	1,000	1,100
3	1,000	1,210
4	1,000	1,331
5	1,000	1,464

We have covered the basics of a step-up SIP in detail in the link below:

Does the step-up SIP create a larger portfolio than a normal fixed SIP?

We have a data set for rolling returns: What are rolling returns of SIP and a lump sum of direct mutual funds?

Using that data set, in the table below, we show the median portfolio values for various equity mutual fund categories, for a 5 or 7-year SIP versus a 10% step-up SIP. The date range is January 2013 to June 2024.

Category	Any 5y SIP	Any 5y SIP 10% step-up	Any 7y SIP	Any 7y SIP 10% step-up
Contra Fund	690,724	1,122,015	942,211	2,044,404
Dividend Yield Fund	669,417	1,075,894	897,589	1,907,030
ELSS	682,739	1,077,367	904,398	1,895,113
Flexi Cap Fund	669,815	1,077,407	905,883	1,884,933
Focused Fund	692,468	1,079,890	907,854	1,902,881
Large & Mid Cap Fund	710,246	1,110,161	932,652	1,935,861
Large Cap Fund	646,426	1,024,039	858,869	1,783,235
Mid Cap Fund	751,573	1,175,645	989,243	2,097,582
Multi Cap Fund	732,906	1,189,131	1,002,543	2,155,172
Sectoral/Thematic	694,962	1,103,567	927,140	1,901,144
Small Cap Fund	853,889	1,379,051	1,173,391	2,316,132
Value Fund	689,919	1,086,240	908,994	1,870,727

Here, the SIP amount is ₹10,000 per month and increases, in the step-up case, by 10% a year.

In each of the cases, the portfolio with the step-up SIP is higher than the case with the fixed SIP.

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Portfolio rebalancing during goal-based investing: why, when and how?

What exactly happens inside the step-up SIP?

Let’s look into a simple 10% step-up SIP like this:

Year	SIP	10% Step-up SIP
1	1,000	1,000
2	1,000	1,100
3	1,000	1,210
4	1,000	1,331
5	1,000	1,464

Readers should recognize that this is a very simple combination of:

a ₹1,000 SIP running for 5 years
a ₹10 SIP running for 4 years and started after 1 year
an ₹11 SIP running for 3 years and started after 2 years and so on

So there are two things to note:

the total amount invested is higher in a step-up SIP
the returns of the step-up SIP depend more on the performance of the later years when the amount invested per month is higher

The table below shows the step-up versus fixed SIP investment amount for a ₹10,000/month starting value. We have arranged the table in increasing order of invested amount.

Type Of Investment	Total invested
1y SIP	120,000
1y SIP 10% step-up	120,000
2y SIP	240,000
2y SIP 10% step-up	252,000
3y SIP	360,000
3y SIP 10% step-up	397,200
5y SIP	480,000
7y SIP	600,000
10y SIP	720,000
5y SIP 10% step-up	732,612
7y SIP 10% step-up	1,138,461
10y SIP 10% step-up	1,912,491

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