What are SIPs and step-up SIPs?
As per an ET analysis by Anulekha Ray, SIPs allow you to invest a fixed amount in mutual funds at regular intervals, whether daily, weekly, or monthly.While standard SIPs are beneficial, step-up SIPs can significantly enhance your investment growth. A step-up SIP involves increasing your investment amount periodically, typically annually, as your income grows. This strategy maximizes your returns through the power of compounding.
Using SIPs to get over Rs 1 crore
- For example, if you start a SIP with Rs 5,400 per month at a 12% annual interest rate, you will have Rs 49.6 lakh after 20 years.
- If you increase your investment by 5% each year, you’ll invest Rs 5,670 per month in the second year and Rs 5,953.5 per month in the third year. After 20 years, this 5% annual increase will grow your investment to Rs 68.87 lakh.
- If you raise your SIP by 8% each year, you’ll have Rs 85.92 lakh after 20 years. Increasing your SIP by 10% annually will result in Rs 1.06 crore after 20 years.
Table source: ET
As you can see, starting with Rs 5,400 per month and increasing it each year can help you reach Rs 1 crore. Even small yearly increases can significantly boost your final portfolio value over time.
Benefits of step-up SIPs
Accelerated wealth creation
One key reason to choose a step-up SIP is to grow your wealth faster. Mutual funds can provide good returns if you invest long-term. Investors often use SIPs for goals like children’s education, marriage, buying property, or retirement.
Countering inflation
A step-up SIP is beneficial because it counters inflation and adjusts your savings with income increases, like salary hikes.
Adapting to income growth
Many salaried people get annual raises, so financial advisors recommend increasing your SIP amount each year.
Important considerations for step-up SIPs
Income stability
The idea behind a step-up SIP is that your income will rise every year. If you choose a percentage-based step-up SIP, you need to adjust your cash flow to match. However, job loss or a family member losing income can make it hard to increase your SIP amounts annually.
Long-term commitment
If you stop increasing your SIP investment each year, it will affect your total returns. However, if you continue raising it, you’ll benefit in the long run. If your income increases more than expected, you can raise your SIP by a larger amount and reach your goal sooner.