What is Step Up SIP? How you can build wealth using the Step Up Option? Well, investing in mutual funds through a Systematic Investment Plan (SIP) has become a popular choice for many seeking to gradually increase their wealth. However, it is a fact that your income grows with time, hence the same fixed investment in a regular SIP may no longer match your improved financial situation and objectives. So, what can be done? You can either go for a new SIP with a new folio number or you can opt for Step Up SIP.
What is a Step Up SIP?
Step-Up SIP is a method where your Mutual Fund SIP Installment will gradually rise by a specified amount and frequency set up by you. You can say that Step Up SIP is an advanced version of regular SIP in Mutual funds. The main idea of a Step Up SIP is to match the investment amount with the investor’s rising income or financial objectives.
How Does a Step Up SIP Work?
Initial Investment
Like a regular SIP, you start with a fixed investment amount that is debited from your bank account and invested in a chosen mutual fund scheme at regular intervals (monthly, quarterly, etc.).
Periodic Increase
Unlike a regular SIP where the investment amount remains constant, a Step Up SIP allows you to increase the SIP amount at predetermined intervals, such as annually. For example, if you start with an SIP of ₹5,000 per month, you can set it to increase by ₹1,000 every year. So, in the second year, your SIP amount would be ₹6,000 per month, and in the third year, it would be ₹7,000 per month, and so on.
Flexibility in Increment
The investor has the flexibility to decide the amount and frequency of the step-up. The increments can be based on a fixed amount or a percentage increase.
Automation
Once set up, the step-up increments are automated, ensuring a disciplined investment approach without the need for manual intervention each time.
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Benefits of Step-Up SIP
Compounding Effect
By increasing your investments regularly, you benefit more from the power of compounding, leading to potentially higher returns over the long term.
Aligned with Income Growth
Step Up SIPs are ideal for salaried individuals whose income increases periodically. As their income grows, they can comfortably increase their investment contributions.
Achieve Financial Goals Faster
By systematically increasing the investment amount, investors can accumulate a larger corpus, helping them reach their financial goals more quickly.
Inflation Adjustment
Over time, inflation reduces the purchasing power of money. Increasing SIP contributions helps counteract the effects of inflation.
Example Scenario
Let’s assume you start a Step Up SIP with the following parameters:
- Initial SIP amount: ₹5,000 per month
- Annual increment: ₹1,000 per month
- Investment period: 10 years
- Expected rate of return: 12% per annum
In the first year, you invest ₹60,000 (₹5,000 x 12). In the second year, your monthly SIP increases to ₹6,000, resulting in an annual investment of ₹72,000. This pattern continues with increasing investments each year. By the end of the 10th year, your monthly SIP would be ₹14,000, resulting in a significantly higher corpus compared to a traditional SIP with a constant investment amount.
How to Step Up SIP
Choose a Mutual Fund – Select a mutual fund scheme that aligns with your investment goals and risk profile.
Determine the Step Up Amount – Decide the increment amount or percentage and the frequency.
Set Up the SIP – You can set up a Step Up SIP through your mutual fund provider’s online platform, app, or by visiting their office. To step up you need to select the SIP and select the Step up SIP option. Now you need to enter the amount in multiple of ₹100. If you want to step up period you can select the step-up period option and step-up from 6 months to 60 months or above. Here is a screenshot taken from the ICICI Direct platform about the step-up option.
Monitor and Review – Periodically review your investments to ensure they are on track to meet your financial goals. Adjust if necessary based on changes in income or financial objectives.
When to Start Step Up SIP?
Starting a Step Up SIP at the right time is crucial for maximizing its benefits.
Early Career
The earlier, the better. Starting early gives your investments more time to grow and compound. Even modest increments can lead to substantial gains over a longer period.
Post-Increment or Bonus
Got a raise or a bonus? Perfect timing to step up your SIP. Channeling extra income into investments helps you avoid lifestyle inflation and boosts your financial health.
Major Life Events
Transitions like getting married or the birth of a child can be good times to re-evaluate and step up your SIP contributions, ensuring future financial security.
Market Conditions
While market timing isn’t recommended, starting or stepping up your SIP during market downturns can be advantageous. You get more units for your money, setting you up for potential gains when the market rebounds.
When to Stop Step Up SIP?
Knowing when to stop is as important as knowing when to start.
Achieving Financial Goals
If you’ve reached your targeted corpus or financial goal, it might be time to reassess your investment strategy. You can either switch to a different SIP strategy or redirect your funds to other financial priorities.
Financial Constraints
Life happens. If you’re facing financial difficulties, it’s okay to pause or reduce your SIP contributions. The flexibility of Step Up is that you can always adjust based on your current financial situation.
Retirement
As you approach retirement, you might want to shift from aggressive growth to preservation of capital. Reducing or stopping your Step Up SIP can be part of this transition, focusing instead on safer investment avenues.
Major Expenses
If you’re planning for a significant expense, like your child’s education or buying a property, you might need to reallocate funds. In such cases, stopping or adjusting your Step Up SIP might be necessary.
Difference Between Step Up SIP and Regular SIP
Understanding the key differences can help you choose the right investment plan.
| Regular SIP | Step Up SIP | |
| Flexibility | Consistent, fixed contributions. | Offers flexibility to increase contributions over time. |
| Growth Potential | Steady but possibly lower returns. | Potential for higher returns due to incremental investments. |
| Financial Commitment | Easier to maintain with a fixed amount, providing predictability. | Requires a commitment to increase contributions, which might be challenging during financial strain. |
| Suitability | Ideal for those preferring a steady, predictable investment approach. | Better for those expecting income growth and aiming for long-term goals. |
FAQs
What is the minimum increment in a Step Up SIP?
Most financial institutions allow you to decide the increment amount, typically starting from a small percentage or a fixed amount like ₹100.
Can I change my Step Up SIP increment?
Yes, most providers offer flexibility to adjust your increment amount or frequency based on your financial situation.
What happens if I miss an increment?
Missing an increment doesn’t penalize you; you can continue with your existing contribution or adjust when you’re financially ready.
Are Step Up SIPs riskier than Regular SIPs?
The risk depends on the underlying investments. Both SIPs invest in the same mutual funds, so the inherent risk is the same. The difference lies in the contribution strategy.
Can I switch from a Regular SIP to a Step Up SIP?
Yes, most mutual fund providers allow you to switch from a Regular SIP to a Step Up SIP. You need to check for an online platform where you step up regular SIP or contact your service provider.
Conclusion
A Step Up SIP is an effective investment approach for individuals seeking to gradually accumulate wealth over a period of time. By gradually increasing the money you invest, you can take advantage of compounding benefits, match your investments with income increases, and reach your financial objectives in a more effective way.
