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.
š Topics covered:
- What is a step-up SIP?
- Why do we care about a step-up SIP?
- Corpus created via step-up SIP for various combinations
- How to create a 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 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.
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 ā¹10,000/month
- the total investment is 10x ā¹10,000 = ā¹1 lakh
- the final corpus is 50x ā¹10,000 = ā¹5 lakhs
Similarly, if the initial SIP is ā¹50,000/month
- the total investment is 10x ā¹50,000 = ā¹5 lakhs
- the final corpus is 50x ā¹50,000 = ā¹25 lakhs
5-year investment via step-up SIP
10-year investment via step-up SIP
15-year investment via step-up SIP
20-year investment via step-up SIP
25-year investment via step-up SIP
30-year investment via step-up SIP
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 yearās 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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