Step-Up SIP; An Essential Tool for Wealth Creation

Most investors know that SIP is one of the best methods to invest in mutual funds and it helps in averaging your investment cost. However, there is another method called STEP-UP SIP, which not only helps in averaging the investment cost but also gives an extra corpus at the end of investment tenure.

Let us check out what STEP-UP SIP is?

STEP-UP SIP is a method of investment where an investor increases his/her existing SIP value by a certain percentage in regular time frames. Due to its nature of increments in SIP value, this method is also called as an Incremental SIP or Top-Up SIP.

How the STEP-UP SIP works?

As said above, STEP-UP SIPs tend to increase a SIP’s value in regular timeframes (usually a year). This leads to an increased cash flow to investments, resulting in additional future value than a Traditional or Static SIP.

From this, we can understand that, while SIP is a tool for rupee cost averaging, STEP-UP SIP is used to increase the future value of the investments along with rupee cost averaging.

An Illustration:

Case 1: Traditional or Static SIP in HDFC Nifty 50 Index Fund

As per our back-tested results, if you had started a Traditional SIP of Rs.5,000/- in HDFC Nifty 50 Index Fund on the 25th of every month for 5 years, the wealth accumulated would have been Rs.4.63 lakh.

Case 2: STEP-UP or Incremental SIP in HDFC Nifty 50 Index Fund

If you had started a STEP-UP SIP with a beginning value of Rs.5,000/- and incremented the SIP by 15% every year, as shown below, then the wealth accumulated would have been Rs.6,05,993.42.

Though the time frame and return on investment are similar in both the above cases, the accumulated corpus in case 2 of STEP-UP SIP is more by 31% compared to Traditional or Static SIP. This increase in the corpus at the end of investment tenure is because of incremental investments made during the SIP tenure.

An additional benefit from STEP-UP SIP:

STEP-UP SIP not only derives all the features of a static SIP but also gives additional advantages; check an illustration to understand this.

Let’s say you had started a SIP of Rs.5,000/- and planned to increment it by 15% every year; then, in the 2nd-year of your investment tenure, markets fell aggressively.

Regardless of the market condition, you have increased SIP by 15% as per your plan, I.e., from Rs.5,000/- to Rs.5,750/-. then you are not only accumulating more units due to the fall of NAV but also acquiring more units due to incremented SIP value.

The below real-time back-tested data gives a clearer picture of how the units accumulated will differ in Static SIP and STEP-UP SIP.

On the other way around, if the market moves up in the 2nd year of your investment tenure, it is good since we are already in profit.

Thus, STEP-UP SIP has an extra edge over Traditional SIP, and we strongly recommend our readers to cultivate the habit of Stepping up their SIPs.

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