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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
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?

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:

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.

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Also read
Understanding dividend investing: should you invest in stocks or mutual funds for dividend income?

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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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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