Step-up SIP - What is it and how does SIP Top-up Work?

Step up SIPs

Systematic Investment Plans, or SIPs, are very popular as they allow you a disciplined approach to investing in mutual fund schemes. You can start a SIP in any mutual fund scheme that you prefer and invest periodically affordable amounts to build up a substantial corpus over a long term period. SIPs offer you the benefits of –

• Affordable investments
• Disciplined investments and
• Rupee cost averaging

When you invest through SIP, you choose a fixed amount of money that would be invested at periodic intervals. But what if you want to increase the SIP amount? Can you do so in the existing ongoing SIP investment?

For doing that you may have to start a fresh SIP for the additional amount. The current SIP amount would not be allowed to increase unless you have opted for “Step up” feature at the time of starting your SIP investment. Let’s understand what this feature is all about.

What is a step-up SIP?

A step-up SIP, also called a top-up SIP, is a type of SIP investment wherein you can increase your monthly SIP investment amount periodically at a fixed rate. A step-up SIP, therefore, allows you to increase your mutual fund investments as your income grows.

How does a step-up SIP work?

• A step-up SIP increases your monthly SIP investments in any of the following two modes –
• By a fixed amount
• By a fixed percentage

When you invest in a step-up SIP scheme, you have to specify which increment mode you prefer, the amount or rate of increase, the frequency of increase (annually or monthly) and the time up to which the increase should be done. When all the details are provided, your SIP commences and then increases at the defined rate and at the defined interval.

Let’s understand the working of a step-up SIP by an example –

Suppose you choose a step-up SIP of INR 5000 due every month. You choose to increase the SIP by 10% every year for up to 10 years. In this case, when you start the SIP, the first year, your investments would be done @ INR 5000 every month. Thereafter, in the next year, the SIP amount would increase to INR 5500. In the third year, the SIP amount would again increase to INR 6050, and so on.

Alternatively, you could choose to increase the SIP by a fixed amount of INR 1000 every year rather than a fixed percentage. In that case, your SIP in the first year would be INR 5000 per month. In the second year, it would increase to INR 6000, then INR 7000, and so on.

Thus, under the step-up SIP scheme, your SIP amount would increase by a specified amount every year, allowing you to step-up your investments over time. You can also specify a maximum SIP amount, which would serve as the maximum limit to which the SIP would increase over time. When the increased SIP reaches the maximum specified amount, no more increase would be affected, and your investments would continue at the maximum amount.

• Benefits of step-up SIPs
• Step-up SIPs prove beneficial than conventional SIPs because of the advantages that these schemes provide. Such advantages are as follows –
• You can sync your investments with increasing income

During your active working life, your income does not remain stagnant at one level. It increases with the increase in your experience and your appraisals. When your income increases over time, why shouldn’t your SIP increase too? Step-up SIPs allow you to effortlessly increase your investments so that your increasing income is saved to yield an increased corpus.

You can accumulate a higher corpus

As you increase your SIP investments, your corpus grows. Step-up SIPs allow you to increase your savings even when you are a passive investor. Your marginal propensity to save increases as your income increases through step-up SIPs. A slight increase in your SIP investment can help you meet your financial goals faster.

It helps you face inflated costs

The higher corpus which you can avail through step-up SIPs also allows you to meet the increased cost of living due to inflation. As inflation raises the cost of goods and services, the corpus that you accumulate through step-up SIPs allow you to meet such inflated costs without any difficulty.

It results in disciplined savings

Ideally, as your income grows, so should your investments. However, this is seldom the case. As incomes increase, many individuals squander their money in unnecessary indulgences rather than in savings. Step-up SIPs ensure that a part of the increased income is directed to disciplined investments so that you are not tempted to spend your earnings mindlessly.

It is convenient

Rather than looking for different fund options for a new SIP to boost up your investments, a step-up SIP allows you to increase your investments through the existing fund itself. Step-up SIPs, therefore, provide you with the convenience of managing a handful of funds as you don't have to manage and monitor multiple mutual fund schemes for enhanced investments.

Step-up SIPs, therefore, are the ideal solution for increasing your investments over time as your income increases. It is a smart saving solution if you want to create a higher corpus for your life’s goals. Beginners can choose step-up SIPs to start investing small, affordable amounts as they start their mutual fund portfolio and then gradually increase their investments as their income and knowledge grows. So, make your SIP investments dynamic through step-up SIPs. Find out some of the best performing step-up SIPs at IndiaNivesh, and we promise you expert assistance with your mutual fund investments.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.