SIP step-up and market correction: When to increase investments and when to hold back

A market correction can leave investors questioning whether to increase their systematic investment plan (SIP) when an annual step-up falls due. While falling portfolio values may prompt caution, postponing an increase could also affect the amount accumulated towards a financial goal.

A SIP step-up involves increasing monthly contributions periodically, usually every year. For instance, an investor with a ₹20,000 monthly SIP and a 10% annual step-up would raise the contribution to ₹22,000 in the following year.

Aditya Agarwal, Co-founder of Wealthy.in, a wealth management platform for mutual fund distributors, said investors who can afford the increase should generally follow their planned schedule. A correction can allow an investor to purchase more mutual fund units for the same amount, although it does not guarantee gains or rule out further losses.

The decision should also account for changes in household finances.

Piyush Jhunjhunwala, Founder and CEO of Stockify, an Indian fintech platform, said an investor receiving a 10% income increase could consider raising the SIP by 5-10%, provided cash reserves and debt repayments remain manageable.

Manish Mehta, Chief Business Officer at SBI Mutual Fund, one of India’s oldest and largest asset management companies, said annual step-ups of 10-20% could be considered based on income growth and cash-flow comfort.

Amit Kumar, Head of Third Party Distribution at Religare Broking, a full-service stock broking house, suggested allocating 50% of an income increment towards a SIP increase, 30% towards strengthening the emergency fund or repaying high-cost debt, and 20% towards lifestyle expenses. This is a suggested budgeting framework rather than a universal rule.

SIP step-up for retirement vs. goals three to five years away

The time remaining until a financial goal should influence where additional contributions are invested.

For retirement or other goals 15-20 years away, regular increases can help build the invested corpus over time.

Agarwal said investors could continue planned step-ups if affordable, while Kumar recommended aligning annual increases with income growth.

Mehta suggested a 10-20% annual increase for longer-term goals, while Jhunjhunwala said 5-10% could be considered where cash flows permit.

For goals three to five years away, the priority shifts towards protecting the amount needed at a specific date. Kumar recommended considering debt, arbitrage or conservative hybrid funds instead of increasing equity exposure simply because markets have fallen.

Agarwal also said additional investments should reflect the asset allocation appropriate for the goal.

Mehta suggested annual step-ups of around 5-10% for medium-term objectives. These percentages are indicative suggestions from the experts, not prescribed rates for all investors.

What does delaying a SIP step-up cost?

The effect of postponing an increase depends on whether the delay applies only to the current year or shifts the entire future schedule.

Consider an illustrative example of a ₹20,000 monthly SIP, a 10% annual step-up and a 20-year horizon. Assuming a constant annual return of 10%, compounded monthly, the projected corpus under the original schedule would be about ₹3.40 crore.

Current year’s step-up delayed by six months: estimated shortfall of ₹79,000.

Current year’s step-up delayed by 12 months: estimated shortfall of ₹1.5 lakh.

Entire step-up schedule shifted by six months: estimated shortfall of ₹16 lakh.

Entire step-up schedule shifted by 12 months: estimated shortfall of ₹31 lakh.

These figures are illustrative calculations, not return forecasts or guarantees. Actual returns will vary with market performance and investment timing.

The distinction matters because a one-time delay does not have the same effect as repeatedly postponing future increases. The latter can leave a smaller amount invested throughout the remaining investment period.