Step-up SIP, commonly known as top-up SIP, is an automated facility through which SIP contribution can be increased by a predetermined fixed amount, at periodic intervals. It has to be in line with one’s financial goals and income level. Experts state that the investor should opt for this facility right at the time of enrolling for the SIP.
The periodic intervals can be quarterly, half-yearly, or annual. It should also be noted that few AMCs still do not offer the option of automatically increasing the SIP amount, so one has to manually make a transaction to do the same.
Difference between conventional SIP and step-up SIP
Conventional SIPs no not allow investors to raise their contribution during their SIP tenure. If an investor wants to do the same, he/she has to start a fresh SIP or make lump-sum investments. One of the major outcomes is that those lacking financial discipline fail to increase their SIP contribution in sync with their rising incomes. This is where step-up SIPs come to the rescue.
According to experts, step-up SIPs allow investors to automate their SIP contribution and it increases in sync with their expected growth of income. With automated incremental investing, SIP investors can enjoy greater benefits from the power of compounding, thus attaining their financial goals within a shorter period of time.
Who should opt for step-up SIPs?
It is especially beneficial for those who have a dearth of adequate surplus to invest for their financial goals. By availing other option of step-up SIPs, they can start off with lower contribution and then gradually increase their investments along with their increasing income. It is also a great option for those who are not very financially disciplined to increase their investments with growing income.
Benefit of step-up SIP: Built up corpus takes care of rising inflation
It goes without saying the value of money is decreasing with time due to rising inflation. An investor needs to step up any investment on the basis of this fact. Over the last couple of decades, the average rate of inflation has been 6.54%. As an industry insider illustrates, if you invest Rs. 3000 a month, it would be the same as investing Rs. 10,500 in 20 years. So, an investment target that seems worthwhile today, say Rs. 1 crore by 2037, might actually become Rs. 3.5 crore by the time one reaches that stage, assuming the same inflation rate of 6.54% per annum. Thus, it can be easily deciphered that if you want to create more wealth, you have to step up your investment every year.
Challenges in step-up SIP:
- Income should increase year-on-year: the basis of a step-SIP is the assumption that the investor’s income would keep increasing in a linear manner year-on-year. If the income does not increase as much in some particular years or expenses increase too much, it will leave insufficient surplus, in which case, continuing with step-up SIP will be difficult for the investor.
- Changes in lifestyle and expenses: be it a newborn child, or a loss of job or any unforeseen circumstances, any significant change in lifestyle inevitably takes a toll on the whole cash flow. If this happens after starting a step-up SIP, then it may be difficult to continue with rising investments. Experts are of the opinion that one should be very careful not to overshoot while stepping up his investment. It is never a good idea to commit yourself to more than what you can afford to set aside.
- Illustration of step-up SIP with a mutual fund scheme: take a look at the illustration in the table below, and you would understand the importance of increasing monthly SIP investments every year into mutual fund schemes you are holding, according to your goals and rise income.