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What is a step-up SIP and how much more wealth does it create vs. a normal SIP?

This article explains the concept of a step-up SIP and allows you to calculate how much more returns can you get using a step-up SIP vs. a normal SIP.

What is a step-up SIP and how much more wealth does it create vs. a normal SIP?


Posted on 14 Feb 2024
Author: Sayan Sircar
7 mins read
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This article explains the concept of a step-up SIP and allows you to calculate how much more returns can you get using a step-up SIP vs. a normal SIP.

What is a step-up SIP and how much more wealth does it create vs. a normal 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 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 an 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
6 1,000 1,611
7 1,000 1,772
8 1,000 1,949
9 1,000 2,144
10 1,000 2,358

Related:
SIP, SWP and STP - what do they mean, which one should you choose and when?

Why do we care about a step-up SIP?

Investible surplus = Income - Expenses

Income increases with time for most people while they are working and not yet retired. Their expenses also increase and not necessarily at the same rate.

Year Income (10% hike) Expenses (8% inflation) Surplus SIP Extra investment
1 100.0 60.0 40.0 40.0 0.0
2 110.0 64.8 45.2 40.0 5.2
3 121.0 70.0 51.0 40.0 11.0
4 133.1 75.6 57.5 40.0 17.5
5 146.4 81.6 64.8 40.0 24.8
6 161.1 88.2 72.9 40.0 32.9
7 177.2 95.2 81.9 40.0 41.9
8 194.9 102.8 92.0 40.0 52.0
9 214.4 111.1 103.3 40.0 63.3
10 235.8 119.9 115.9 40.0 75.9

In this case, we can see that the investment amount is growing at 11% per year. We can invest this extra amount as a step-up SIP to create extra wealth. The rest of this article shows you how much extra wealth you create with a step-up SIP.

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Corpus created via step-up SIP for various combinations

In each of the tables below, we show:

  • corpus reached via various combinations of step-up SIP percentage and average yearly returns
  • the amount invested vs. the corpus (the invested amount column shows the total invested for each row)
  • the final corpus as a multiple of the first SIP amount at the beginning of the investment
  • row 1, with yearly step-up = 0% is the result of a normal i.e. SIP without step-up

The returns are average and post-tax. Readers should keep in mind that risky assets like the share market do not give straight line return like FD.

If the table shows a value of 50x, and the first value in the row is 10x, then it means that if the initial SIP is ₹10,000/month

  • the total investment is 10x ₹10,000 = ₹1 lakh
  • the final corpus is 50x ₹10,000 = ₹5 lakhs

Similarly, if the initial SIP is ₹50,000/month

  • the total investment is 10x ₹50,000 = ₹5 lakhs
  • the final corpus is 50x ₹50,000 = ₹25 lakhs

5-year investment via step-up SIP

Step Up SIP Corpus After Investing for 5 Years

10-year investment via step-up SIP

Step Up SIP Corpus After Investing for 10 Years

15-year investment via step-up SIP

Step Up SIP Corpus After Investing for 15 Years

20-year investment via step-up SIP

Step Up SIP Corpus After Investing for 20 Years

25-year investment via step-up SIP

Step Up SIP Corpus After Investing for 25 Years

30-year investment via step-up SIP

Step Up SIP Corpus After Investing for 30 Years

How to create a step-up SIP?

Many investors do not have a step-up SIP already in place for their funds. Depending on the platform you have to follow one of the following steps:

  • stop the existing SIP, start a new one with the step-up option enabled
  • start a new SIP with the difference amount between current and next year’s step-up
  • invest the difference manually for sometime until the old SIP runs out. Do not keep this amount in FD for doing a lump sum. It makes no difference in long-term returns

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This post titled What is a step-up SIP and how much more wealth does it create vs. a normal SIP? first appeared on 14 Feb 2024 at https://arthgyaan.com


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