Does a step-up SIP provide a higher return than an ordinary SIP?
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?
Posted on 14 Jul 2024
Author: Sayan Sircar
Tags: 
Portfolio Construction
7 mins read
Portfolio Construction
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This article explains how the return and corpus created vary between a step-up SIP and an ordinary fixed 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?
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:
Related:
What is a step-up SIP and how much more wealth does it create vs. a normal SIP?
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.
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 |
Related Articles
- What is a step-up SIP and how much more wealth does it create vs. a normal SIP?
- The lie of wealth-creation via SIP in mutual funds
- What is a stock SIP? Should you have one?
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This post titled Does a step-up SIP provide a higher return than an ordinary SIP? first appeared on 14 Jul 2024 at https://arthgyaan.com
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