What is a step-up SIP in mutual funds?

49

Step-up SIP means an automatic arrangement whereby the Systematic Investment Plan (SIP) amount in mutual funds is modified at a predetermined rate and interval. SIPs are a helpful and efficient way of wealth creation through savings. Step-up SIPs are comparable to your journey in fitness training, where you scale up your efforts intermittently to increase strength and fitness.

In step-up SIP mutual funds, you increase your monthly contribution in your SIP at specific intervals as per your preference and life progress. You can step-up your SIP contribution quarterly, half-yearly, or annually. You can choose to scale your contribution by a fixed percentage or by a fixed amount. For instance, if you decide to scale up your monthly SIP contribution every year by Rs. 2,000 and you started with Rs. 3,000 in 2021, it would be Rs. 5,000 in 2022, Rs. 7,000 in 2023, and so on.

Basically, you align these increments with your current and prospective income. By doing this, you add an accelerator mode to your financial planning.

Difference between step-up SIPs and conventional SIPs

SIPs are a popular and effective tool of financial planning that help you reach your goals. Step-up SIPs are true to their name and take this effectiveness a notch higher by tweaking the contributions frequently. This benefit is not available in conventional SIPs, where investors cannot increase the amount of SIP contribution through the investment tenure. In case you want to increase the SIP amount, you would have to start a new SIP. This flexibility to channelise your increased earnings into additional contributions in SIPs without initiating a new SIP is only available in step-up SIPs.

How are step-up mutual funds beneficial?

Here are four reasons why step-up mutual funds may fare better than traditional SIPs:

  • Step-up SIPs enable you to combat inflation more effectively than conventional SIPs. Since step-up SIPs allow you to increase your contribution amount regularly, your investment can better mitigate the risk of inflation, which too increases over time.
  • It inculcates financial discipline to align incremental earnings with incremental investment with the objective of wealth creation. These incremental earnings are automatically directed towards the investment rather than being spent entirely on discretionary expenses.
  • As your life progresses, the investments should also be increased, and that’s where step-up SIPs help greatly. The income during your earning years undergoes countless changes, with your journey up the corporate ladder. With an increase in income, you may not increase your investments voluntarily. Step-up SIPs facilitate this automatic integration of incremental income into investments, which gives you more than a proportionate benefit in the future.
  • Step-up SIPs help accelerate your financial progress towards your goal, as it uses the power of compounding and rupee cost averaging in the best interests of the investors.  Step-up SIPs result in a bigger corpus at the end of tenure.

With step-up SIPs, the benefits that you gain are immense as compared to the conventional SIPs. The biggest differentiator and the most crucial factor that results in a much bigger corpus at the same rate of return through the step-up SIP is your contribution.

When you subscribe to a step-up SIP in the mutual fund investment plans, you make a provision for increased investments through increased contribution to reap significant benefits in the long term. Consider these benefits and start your step-up SIP today by consulting a financial expert.