Step Up SIP: Magic formula of Wealth Creation

Mutual Fund is now familiar to most of the investors. Thanks to social media, TV, newspaper and magazines advertisements. Business channels’ financial literacy programs are also educating investor about the Mutual Funds benefits. People are interested in knowing the concept in detail. They are now eager to take well-informed financial decision to grow their wealth.

Mutual Funds are suitable to all types of investors having ultra short, short and long term horizon. Investor can invest in mutual fund by two ways. First one is Lump sum payment and other one is through SIP. Systematic Investment Plan is a great tool to invest in a staggered manner allowing investor to invest small amounts periodically i.e. weekly, monthly or quarterly. Investor can start investing in mutual fund through SIP by minimum of Rs. 500 only. Some scheme also have monthly SIP of Rs.100.

SIP provides benefit of Rupee Cost Averaging. Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more units of particular mutual fund when prices are low and less when they are high. Thus, in long term you are benefited by a bull as well as bear run of the stock market. With all these benefits SIP is now favorite among investors.

Many of you must have your SIPs lined up for each of your life Goals. But do you know its new variation? Have you heard about Step up SIP?

What is Step up SIP?

In a stepup Systematic Investment Plan (SIP), the SIP amount increases automatically at a predefined rate and period. It means you can increase fixed amount of SIP contribution per year at a prefixed percentage.

For example suppose you have 10000Rs. SIP in mutual fund and you decide to increase your SIP amount by 10% every year for next 10 years then your second year SIP amount would be Rs 11000. Your third year SIP amount would be Rs 12100 and so on.

Step up SIP helps investor to accumulate wealth with a smaller amount initially. As individual’s income increases he/she can increase the SIP contribution in that proportion. So the question may arise that should investor increase his/her SIP as the income increases?

Ideally, it should be. If you do so you can achieve your Financial Freedom early.

Let’s see it in the example.

One of my clients wanted to accumulate 6 Cr for his retirement. He was 29 years old. His monthly take home salary was 50000Rs.

I gave him two options.

I proposed him to make SIP in good quality Equity Mutual fund. SIP made in a good quality Large, Multi-cap funds and smaller portion in Mid and Small caps can generate returns ranging from 12 to 16% p.a. But considering ups and downs in equity market it is always prudent to be realistic and reasonable. SIP investments’ rate of return should be considered at 11% p.a.(overall portfolio return) for safer side for SIP investment.

Let’s study those two different scenarios which I had proposed to understand how he would accumulate his targeted amount of 6 CR.

Scenario 1:

Rate of return -11%

Tenure 25 years

Monthly Investment required to hit the target of 6 Cr is Rs 37750 throughout his tenure i.e. 25 years.

From 50000 rs salary he had to invest more than 70% of the salary to his single life goal, which is simply Impossible.

Scenario 2

Rate of return -11%

Tenure 25 years

Monthly Investment required to hit the target of 6 Cr is Rs 16100 only for the first year which comes around 32% of his salary. As the client was young, single and no major responsibility on his shoulder he could manage this SIP amount easily.

I proposed him to have 10% annual increase in monthly SIP amount every year as per his salary hike. So 2nd-year monthly investment he made was Rs 17710 and on the 3rd-year monthly investment made was Rs.19481 and so on…

My client was very happy to know about Step Up SIP concept. He accepted the second proposal as he was sure 10% increase in his salary year-on-year.

To Summarize

  • In the 1st scenario, we assume a flat monthly SIP investment throughout the tenure to accumulate the targeted amount.
  • The 2nd scenario, we used Step up SIP where a fixed percentage of increase in monthly SIP per year done with an increase in income every year to accumulate the targeted amount

Gradual sustainable increase in saving per year with an increase in income will help my client to achieve his dream target.

So this a magic of Step Up SIP. I advise you all to go for this concept to fulfill all your life goals. It helps to achieve Financial Freedom early in life.

Happy investing !!!

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