Chad HarrisonThe step-up or top-up facility offered by mutual funds allows investors to increase their SIP investment amount at pre-defined intervals. This helps counter the negative effects of inflation and lets investors build their corpus faster.
What is a step-up SIP?
A step-up SIP allows investors to gradually increase their SIP installment amount by a fixed predefined amount, usually on an annual basis.
For example, if an investor starts an SIP of ₹5,000 per month in an equity fund, they can opt for a step-up of ₹1,000 per year. So, in the second year the SIP amount increases to ₹6,000, in the third year it becomes ₹7,000 and so on. The incremental amount can also be a percentage rather than a fixed rupee amount.
Benefits of a step-up SIP
- Combats Inflation – A step-up SIP ensures your investment amount increases with inflation every year, maintaining the purchasing power.
- Boosts Investments – It disciplines investors to invest higher amounts each year, which speeds up wealth creation through the power of compounding.
- Rupee Cost Averaging – Increasing installments allow investors to buy more units when the market falls and vice versa, reducing risk.
- Flexibility – Investors can choose the step-up amount and even pause step-ups for a year if required.
How a step-up SIP beats traditional SIP?
Let’s say an investor saves ₹5,000 per month through SIP in an equity fund that gives 12% annual returns. With a traditional SIP, the monthly investment remains the same over the years.
But if they opted for a step-up SIP with ₹1,000 annual increase, the monthly investment amount rises by ₹1,000 every year.
After 10 years, the traditional SIP corpus grows to ₹11.25 lakhs. But with step-up SIP, the corpus would grow to ₹13.5 lakhs, a good 20% higher!
This example demonstrates the power of step-up SIP in growing your mutual fund investments.
Calculating returns from step-up SIP
You can use online step-up SIP calculators to estimate maturity returns from step-up SIPs.
Simply input details like starting SIP amount, step-up details, investment tenure and expected return to get the maturity amount.
For example, for a ₹25,000 initial SIP with a ₹5,000 annual step-up at 10% expected return for 5 years, the corpus is ₹19.68 lakhs.
You can also do a manual calculation using the Future Value formula in Excel:
FV = Regular SIP Amount x ((1+Annual Return)^Number of Years – 1) / (1+Annual Return – Step Up Return)
Here, the step-up return is the incremental percentage increase in the SIP amount every year.
For the above example:
FV = 25,000 x ((1+0.1)^5 – 1) / (1+0.1 – 0.2) = ₹19.68 lakhs
The second part of the formula (1+ step up return) accounts for the yearly SIP increase.
Step-up SIPs help investors counter inflation and accelerate their wealth creation by systematically increasing investments. Calculate maturity values accurately to estimate the benefit of opting for this facility.
Chad Harrison
