Power of Step-Up SIP and How to Use A step-up SIP Calculator to Plan Your Investments

A step-up SIP can help investors potentially accelerate the wealth-creation process by increasing their investments gradually and periodically.

Systematic Investment Plans (SIPs) in mutual funds are a popular and convenient way to potentially build wealth over time through consistent yet affordable instalments. However, investors looking to find an even more efficient investment strategy can consider step-up SIPs.

A step-up SIP can help investors potentially accelerate the wealth-creation process by increasing their investments gradually and periodically. By steadily increasing your investment amount, you can help your investment strategy keep pace with inflation and rising incomes.

The power of a step-up SIP can be visualised with the help of a step up SIP calculator. This article tells you more about what a step-up SIP is and how to use the calculator to assess the effectiveness of this strategy.

What is a step-up SIP?

A step-up SIP allows investors to increase their SIP contribution at regular intervals, typically in line with salary hikes or other increases in income. This helps you create more wealth without feeling the burden of a higher investment right from the start. For instance, you can start a step-up SIP mandating a 10% increase in your instalments every year. So, for the first year, if you are investing Rs. 1000 a month, your next year’s instalment will automatically rise to Rs 1,100 and so on. 

In contrast, a regular SIP involves fixed instalments throughout the tenure. While this too can be very beneficial, it does not take advantage of the opportunity to invest more as your earning potential increases. Instead, you need to cancel your ongoing SIP and start a new one with the increased amount each time you want to increase your investments.

The biggest advantage of step-up SIP is that through periodic and affordable increments, you can give a significant boost to your return potential. As the amount you invest in SIP grows, more of your money gets market exposure, leading to increased opportunities for compounding.

Compounding happens when the returns on your investment are reinvested to potentially earn further returns. As your investment base grows steadily, compounding can have an exponential effect. With a step-up SIP, the rate at which your invested base grows also accelerates, further optimising the potential of compounding.

Step-up SIP in action

Let’s say you begin with a monthly SIP of Rs. 5,000. After a year, you decide to step it up by 10% to Rs. 5,500. Next year, you step up again by 10%, and so on. This incremental increase means that your invested amount will increase significantly in a few years, which, when combined with the impact of compounding, can result in exponential growth potential as compared to a normal SIP, where the investment amount would stay fixed.

How can a SIP step-up calculator help you plan better?

A SIP step-up calculator can help you envision the impact of a step-up SIP on the return potential of your investment, by giving you quick and accurate estimates. Here’s how it works:

1. Input your starting SIP amount: For instance, if you want to begin with Rs. 5,000 per month, enter that value.

2. Set the percentage of step-up: You can choose how much you want to increase your SIP, say 10% or 15% annually.

3. Choose your investment duration: Whether it’s 10, 15, or 20 years, the calculator will help you see how your wealth can potentially grow over time.

4. Enter your expected returns: This is the rate of return you expect to earn on your investments, depending on the scheme category. You can refer to a scheme or fund category’s historical returns as a reference. It is recommended that you refer to returns over multiple horizons and not just one year. Moreover, it is essential to note that past performance may or may not be sustained in the future.

5. View the results: The calculator will compare your stepped-up SIP against a normal SIP to show how much more wealth you could potentially create.

Let’s take the earlier example of a Rs. 5,000 SIP to illustrate the difference. Assume you choose a tenure of 10 years and initiate a 10% annual step-up. You invest this in an equity scheme, where you expect 12% returns. Using a step-up SIP calculator, you will see that at the end of your tenure, you would have invested Rs. 9,56,268 and your investment would have potentially grown to Rs. 16,70,493. In comparison, if you had opted for a regular SIP, you would have invested a total of Rs. 6,00,000 over 10 years and potentially reached a corpus of Rs. 11,50,193.

It is essential to note, however, that the calculator’s estimates are based on your inputs and assume a fixed and consistent rate of return. In reality, returns will fluctuate, and the rate will depend on market movement.

Benefits of a step-up SIP

As we can see, a step-up SIP can enhance growth potential. Here are some other benefits:

1. Higher return potential: A step-up SIP allows you to steadily grow your investments without much strain. As your salary increases over the years, a step-up SIP makes it easier to invest more without significantly eating into your budget.

2. More opportunities for compounding: The power of compounding plays a big role. As you add more funds each year, the potential returns on those additional investments compound over time, which can result in a larger final corpus compared to a normal SIP.

How to optimise wealth creation potential with step-up SIP

Here are some simple steps to make the most of your step-up SIP:

1. Start early: The earlier you start, the more time your money has to potentially grow.

2. Increase your SIP with salary hikes: Align your SIP increases with your income growth. If you typically get a 10% salary hike, step up your SIP by the same percentage.

3. Plan your investments with an SIP step-up calculator: Regularly use the SIP step-up calculator to check if you’re on track to potentially reaching your goal amount and adjust your contributions if needed.

Conclusion

A step-up SIP offers a simple but effective way to grow your wealth faster than a normal SIP. By gradually increasing your investment amount, you can harness the power of compounding to greater effect, which can potentially lead to accelerated wealth-building potential over time. With the help of a SIP step-up calculator, you can visualise the potential of this approach and plan your investments.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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