# What is a Step-up SIP in Mutual Funds?

What is a step-up SIP in mutual funds? How it is different from conventional SIP offered by mutual funds?

A step-up SIP works exactly like a conventional SIP. There is no difference.

But what a step-up SIP can achieve, far exceeds the benefits of a conventional SIP.

I think, all conventional SIP’s should be converted to step-up SIPs from this point forward.

Till today, conventional SIP’s has helped people to build wealths in long term.

There is no denying that SIP is a great investment tool.

But what if I tell you that the same SIP could have made you more money?

Yes, it is true.

Only with a small tweak, your same SIP could have made you 20-40% more wealth.

Lets see a small example to get a pulse of what a step-up SIP in mutual funds can do for us.

##### Example:

Conventional SIP:

• Your mutual fund gave you 15% p.a. returns.
• Time horizon : 10 years.
• SIP : Rs.5,500/month
• Wealth built : Rs.15.32 lakhs.

Step-up SIP:

• Your mutual fund gave you 15% p.a. returns.
• Time horizon : 10 years.
• Starting SIP : Rs.5,500/month
• Wealth built : Rs.21.76 lakhs (extra by 42%).

Isn’t it fantastic? I am sure you are impressed.

I am sorry, for making step-up SIP look so rosy. If you will ask a mathematician, he may not be as impressed. Why?

But this much is at least true that, in the above example, the person has used the step-up SIP to make Rs.21.76 lakhs.

Had he not used the step-up SIP, his corpus would have been only Rs.15.32 lakhs.

Step-up SIP made 42% extra (compared to conventional SIP) for the person.

If this is true, why a mathematician will not be as impressed?

Because that extra 42% wealth has not been made for free. There is a cost attached to it.

But irrespective of this “cost”, step-up SIP is far-far more effective than conventional SIP’s.

How? Lets get into its details….

## #1. What is step-up SIP in mutual funds?

In a step-up SIP, the monthly contribution (investment) used to buy mutual fund units increases with time.

Suppose you are investing Rs.1,000/month in a Mutual Fund through SIP route for next 5 years.

In this case, for all the 5 years, your SIP contribution each month will be Rs.1,000.

But in case of step-up SIP, the monthly contribution can increase after a specified period of time.

The increase can be as follows:

• Value Increase : absolute amount or in percentage of initial invested amount.
• Increase Frequency : quarterly, semi annually, annually.

Suppose you selected a 10% step-up SIP.

In this case your monthly contribution can be as below:

• 1st year SIP – Rs.1,000/month.
• 2nd year SIP – Rs.1,100/month (10% growth).
• 3rd year SIP – Rs.1,210/month ( – do-).
• 4th year SIP – Rs.1,331/month ( – do-).
• etc…

Suppose you selected a Rs.200 step-up SIP, with semi-annual increment.

In this case your monthly contribution can be as below:

• 1st year SIP (1-6 month) – Rs.1,000/month.
• 1st year SIP (7-12 month) – Rs.1,200/month.
• 2nd year SIP (1-6month) – Rs.1,400/month.
• 2nd year SIP (7-12 month) – Rs.1,800/month.
• etc…

## #2. Why to select step-up SIP?

We all know about SIP’s. We have used this method of investing since last many years now.

The SIP that I am referring to here is a conventional SIP.

Here the monthly contribution remain fixed for all investing years.

This SIP has done well for us. I am sure, not many people has complaints with a conventional SIP.

So when everything is going well, why to change the investment strategy?

Why to select step-up SIP instead of a conventional SIP?

Because it is necessary. Opting in for a step-up SIP is not a luxury.

It should be done more out of necessity.

Suppose you are investing to build a corpus for your child’s higher education.

The corpus that you require is Rs.15 lakhs after 10 years.

But the purchasing power of Rs.15 lakhs, after 10 years, will go down.

It means, you will need to have more than Rs.15 lakhs to meet the higher education need.

How to do it? Adjust your monthly SIP with the annual inflation rate.

##### #2.1 Inflation Rate and step-up SIP

Suppose, on an average the cost of higher education in India will grow at rate of 8% for next 10 years.

In this case, your step-up SIP should use incremental growth of 8% every year.

Conventional SIP:

• SIP Return : 15% p.a.
• Time horizon : 10 years.
• SIP : Rs.5,500 for all 10 years.
• Wealth built : Rs.15.32 lakhs.

Step-up SIP:

• Return : 15% p.a.
• Time horizon : 10 years.
• Starting SIP : Rs.5,500
• Growth in SIP every year : 8%
• Wealth built : Rs.20.23 lakhs.

By increasing the monthly contribution-to-SIP by just 8% each year, the person could increase the overall wealth built in 10 years by 32%[(20.23-15.32)/15.32].

## #3. The cost associated with step-up SIP

When we see the overall benefits of step-up SIP, compared to a conventional SIP, the step-up SIP looks too impressive.

But one must not get too carried away by the numbers.

It is true that step-up SIP in mutual funds builds more wealth than conventional SIP’s.

But the full credit cannot go to step-up SIP alone.

There are 3 entities which contribute to the gains of step-up SIP:

1. You yourself – for contributing higher amount each year.
2. Power of Compounding– Which makes our money grow faster.
3. Mutual Fund – For generating the “desired returns”.

Had the mutual fund given “higher” returns to people who were investing using step-up SIP, we could have give more credit to mutual funds.

But the reality is this:

“good portion of the extra corpus built using start-up SIP is your own contribution”.

##### #3.1 Cost calculations

Suppose two people Mr.X and Mr.Y decided to invest in mutual fund for 10 years time horizon.

Suppose  “X” made Rs.15.32 lakhs by investing in mutual fund through a conventional SIP route.

Monthly SIP of person X was : Rs.5,500.

Another person “Y” made Rs.16.95 lakhs by investing in the same mutual fund throug step-up SIP route.

Monthly SIP of person Y was : Rs.5,500 (annual increment of 3% every year).

Extra capital built-up by “Y” compared to “X” is Rs.1,63.272 (16.95 – 15.32 lakhs).

Total money invested by X & Y:

• X = Rs.6,60,000 (Rs.5,500x10x12 @ 0% growth)
• Y = Rs.7,56,616 (Rs.5,500x10x12 @ 3% growth)

Extra cost of “Y” compared to “X” is Rs.96,616 (7.56 – 6.6 lakhs).

Though “Y” has built Rs.1,63,272 more than X, but he also spent Rs.96,616 more than “X”.

It means, 59.18% of extra capital built was funded by “Y” himself (96,616/163272 = 59.18%).

Similar calculations are shown below for step-up growth rates of 5% and 10% in the below table.

 Case 1 (0%) Case 2 (3%) Case 3 (5%) Case 4 (10%) Starting SIP 5,500 5,500 5,500 5,500 Annual Return 15% p.a. 15% p.a. 15% p.a. 15% p.a. Step-up SIP Increment 0.00% 3.00% 5.00% 10.00% Investment Horizon 10 Years 10 Years 10 Years 10 Years Investment Cost in 10 years 6,60,000 7,56,616 8,30,141 10,51,870 Built-up Corpus in 10 years 15,32,615 16,95,886 18,17,856 21,76,581 Extra Cost due to step-up SIP (Rs.) 0 96,616 1,70,141 3,91,870 Extra Built-up Corpus due to step-up SIP (Rs.) 0 1,63,272 2,85,241 6,43,966 Percentage  of Extra cost compared to the Extra Corpus 0 59.18% 59.65% 60.85%

You can see that a majority portion of the extra capital that has been built using step-up SIP has been funded by the investor’s contribution:

1. 3%, Case 2 – 59.18% of extra gain was funded by the investor himself.
2. 5%, Case 3 – 59.65% of extra gain was funded by the investor himself.
3. 10%, Case 4 – 60.85% of extra gain was funded by the investor himself.

What we can conclude from this?

Step-up is not as impressive as was seen from its initial introduction.

## #4. Step-up SIP is still good…

What is more important for investors is the realisation of their financial goal.

A conventional SIP is good, but it does not consider the impact of inflation on the final goal.

But a step-up SIP is tailor made to tackle inflation.

The best part of a step-up SIP is its simplicity of understanding and implementation.

Just give a standing instruction to the mutual fund company (or a broker), and they will do the rest.

I personally consider step-up SIP in mutual funds an ideal vehicle to practice goal based investment.

## #5. Conclusion…

Like conventional SIP was adopted by common men for investing, step-up SIP will see the same level of acceptability.

Because it helped us to invest small-small amounts each month and still build substantial wealth.

Step-up SIP is an upgraded version of conventional SIP which has an inbuilt feature to tackle inflation.

How this is done?

Suppose my goal is to have Rs.22 lakhs in 10 years.

If I will invest in a diversified equity mutual fund for 10 years, through conventional SIP, my monthly investment cost must be Rs.7,800.

But if I cannot invest Rs.7,800 per month today, what is the alternative?

Earlier there were no easy alternatives.

But now with step-up SIP in mutual funds, I can do the following:

• Increase the SIP @10% each year for next 10 years.

This way I can build Rs.22 lakhs in 10 years.

What is the logic?

The logic is simple. Compared to tomorrow, our present salary is less.

In years to come, I can afford Rs.7,800 for investment. But today I can manage only Rs.5,500/month.

It means, we can start investing slowly today, and with increase of income, our investment can also grow proportionally.

This makes investing very convenient for even those people with low salaries today.

Such people can still build substantial wealth in times to come.

The only limiting assumption made in step-up SIP type investment is that, the investors income must grow with time at a rate matching inflation.

Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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1. Govind Pudi says:

Excellant article. I like the way explain the topic

• Mani says: