Why You Should Step Up Your SIPs Every Year!

By | September 27, 2017

Why You Should Step Up Your SIPs Every Year!

Mutual Fund Systematic Investment Plan (SIP) has enabled even small investors to come forward and plan a big corpus for their retirement. SIP has transformed the way people invest their money. With regular investment and long-term planning, SIPs not only reduce the volatility risk, but it also increases the return prospect and encourages investors to stay invested.

Let us take a look at why you should step up your SIPs:

Why A Simple SIP May Not Be Enough?

SIP helps in achieving the financial goals, but sometimes inflation may bring in nasty surprises. So, your goal of achieving a corpus of Rs. 5 crores after 20 years while considering the inflation at 6% rate may not become a reality if situation changes and the inflation rate rises to 8%. You can tackle such situations by stepping up your SIPs every year by a certain percent for a comfortable number of years. With inflation, you may also get a hike in salary/income every year. You can use the extra saving to increase the SIP amount accordingly.

Why You Should Step Up Your SIPs Every Year?

Stepping up your SIPs every year will always keep you way ahead of inflation impact, and help in creating a bigger corpus to achieve your financial objectives. Let us understand the step-up SIP concept with the help of the below-mentioned table:

SIP Type Monthly SIP Amount Annualized Return (%) No of Years Amount Invested Corpus after 20 years
Simple SIP Rs 20000 15% 20 Rs 48 Lac Rs 3.03 Cr
Step up SIP- 5% increase Rs 20K SIP with 5% step up/annum 15% 20 Rs 79.35 Lac Rs 4.01 Cr
Step up SIP- 7% increase Rs 20K SIP with 7% step up/annum 15% 20 Rs 98.39 Lac Rs 4.55 Cr

Note: All figures are indicative. Return may vary in real situation

From the table, you can see that by increasing the SIP every year by 5% or 7%, the final corpus after 20 years would be around Rs 4 crore to Rs 4.55 crore respectively, i.e. more than 25% from simple SIP.

Stepping-up SIPs inculcates saving habits and helps the investor in avoiding unnecessary expenses on income increment every year. Suppose your income increases by 10% every year and you continue with existing investment size, it would not only increase your spending habit, but would also affect your final investment corpus. Instead, if you use step-up SIP and divert the increased income towards investment, then you’ll stay away from unnecessary expenses and get much bigger corpus in the future.

How To Start A Step-Up SIP?

Depending on your age, remaining year of investment and financial objectives, you can decide when, by how much and in what type of mutual fund you should start stepping up the SIP investment. For example, if you need a conservative approach, then you can step up SIP in balanced fund. An aggressive investor may opt for stepping up SIP in small and mid-cap equity fund. You may also select the option to continue the step up by a certain percentage every year or certain amount every year for a fixed tenure and thereafter continuing the SIP with last stepped up the amount.

You may find a lot more variety of step-up SIP in the market, however, we recommend consulting your financial advisor for the right selection of fund and to step-up with the appropriate amount as per your financial objectives.

And Finally…

Stepping up your SIPs is a very good option for achieving your financial objective smoothly. In some cases, investors may find it difficult to step-up SIPs beyond a certain level, in such a case the step-up option can be withdrawn and investors can continue SIPs with a comfortable amount.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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