Investing can often feel overwhelming, especially for beginners who are unsure about where to start or how much to invest. One of the preferred ways to start investing in mutual funds is through a Systematic Investment Plan (SIP).
An SIP allows you to invest small amounts regularly, making it easier to potentially build wealth over time without significantly affecting your current expenses.
But there’s a way to make SIPs even more powerful: by using an SIP step-up. This facility helps you gradually increase the amount you invest over time, allowing you to start small and grow your invested amount gradually.
With time, this can accelerate the wealth-building potential of your investments. An SIP step-up calculator can help you visualise the potential effectiveness of this incremental approach.
In this article, we’ll explain how step-up SIPs work and how to use an SIP step-up calculator to plan your investments.
What is SIP in mutual funds?
An SIP in mutual funds allows you to invest a fixed amount of money regularly (daily, weekly, monthly, quarterly, yearly, etc.) into a mutual fund. Instead of investing a large amount all at once, SIPs let you build your portfolio slowly and steadily.
SIPs are particularly beneficial for equity funds or equity-oriented hybrid funds, because such funds offer significant wealth-building potential in the long term, making it possible to build wealth over time even through small but consistent investments.
What is an SIP step-up?
An SIP step-up (also known as SIP top-up) allows you to increase your SIP contributions by a fixed percentage or amount at regular intervals, typically annually. This strategy helps you boost your investments steadily.
How does an SIP step-up calculator work?
An SIP step up calculator is a tool that helps you see how increasing your SIP contributions over time can significantly boost your investment returns. You can input your starting SIP amount, the step-up percentage (e.g., 5 per cent or 10 per cent), the duration of your investment, and the expected rate of return.
The calculator then shows you how much your investment can grow over time with the step-up. This allows you to see the difference between keeping your SIP amount fixed and increasing it gradually.
Here’s an example:
● Initial SIP: Rs 1,000 per month
● Step-up percentage: 10 per cent per year
● Duration: 20 years
● Expected return: 12 per cent per year
When you enter these figures in the calculator, you will see that your invested amount with a regular SIP would have come to Rs.24,00,000 in 20 years. In comparison, with a step-up plan, you would have invested Rs 68,73,432.
Moreover, your final investment value can potentially grow to Rs 1,96,92,622 with a step-up SIP, as opposed to Rs 98,92,554 with a normal SIP.
Do note that the calculator assumes a fixed and consistent growth rate for its estimates, based on your expected returns. In reality, mutual fund returns are not guaranteed and can fluctuate based on market movements.
Benefits of SIP step-up
1. Start small, grow big: One of the biggest advantages of an SIP step-up strategy is that it allows you to start with a small amount. This is helpful for young investors who might not have a large sum to invest. As your income grows over time, you can afford to increase your contributions without feeling financial pressure.
2. Take advantage of salary hikes: A step-up SIP allows you to align your investment growth with your income growth. By stepping up your SIP every year, you ensure that your investment strategy keeps pace with your rising earnings.
3. Optimise compounding: Compounding is one of the most powerful forces in investing. By increasing your SIP contributions gradually, you enhance the potential effect of compounding on your investments. Compounding happens when the returns on an investment are reinvested and go on to earn further returns. Over time, as your investment base keeps growing (as returns are earned on returns), compounding can lead to exponential growth. A step-up SIP gives an additional boost to this compounding process by increasing your investment base faster.
4. More efficient planning: Whether you’re investing for retirement, your child’s education, or buying a home, a step-up SIP helps you potentially achieve financial objectives faster.
How to use an SIP step-up effectively
Here are some tips for making the most of an SIP step-up plan:
● Start with a comfortable amount: Start with what you can afford and increase it gradually over time.
● Set a realistic step-up percentage: Typically, a 5 per cent to 10 per cent annual step-up is reasonable for most people, especially if your income is growing at a similar rate.
● Stick to your plan: Consistency is key in investing. Be sure to increase your SIP contributions each year, even if it’s a small step up.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
