Small increase, higher returns: How Step-up SIP builds corpus | Personal Finance News

New Delhi: Investing in a Systematic Investment Plan (SIP) has become one of the most opted methods of growing your wealth over time by inculcating discipline and employing the concept of compounding. In a regular SIP, funds grow with time by investing a fixed amount at regular intervals. However, the impact of investing can be increased substantially by increasing the amount of investment annually. This method of investment is called a Step-up SIP, which accelerates wealth growth as income grows.

A regular SIP builds corpus by investing a fixed amount, often monthly, into mutual funds. The funds grow depending on the stock market returns. It amasses wealth for long-term goals while distributing the market risks and losses incurred across the duration. A SIP instills discipline in financial planning and accumulates a part of one’s income to leverage for corpus building. A small monthly portion of income thus generates a substantially bigger amount at the other end.

When the investment amount  annually increases along with a rising income, the total output grows significantly. The Step-up SIP automatically increases the investment amount by a fixed percentage at a fixed interval of time. This works well towards building wealth for retirement, education funding, and buying property. It works well in beating inflation and spreading out losses across a wide span of time as the income increases.

Take two examples: In Case 1, the monthly investment is Rs 5,000 with a 12 percent annual return, and the investment period is 15 years. With a total investment of Rs 9 lakhs in 15 years, the return would amount to Rs 16,22,880, building a corpus of Rs 25,22,880.In Case 2, the investment amount is increased annually by 10 percent, making it a total investment of Rs 19,06,349. This would lead to a return of Rs 24,35,576. Thus, the corpus generated is Rs 43,41,925.The wealth generated in the two scenarios differs largely by a mere increase in investment by 10 percent each year.

However, the actual wealth generated may vary as the annual returns depend on the stock market, which keeps fluctuating.

For people looking to generate wealth in a relatively shorter period of time, a step-up SIP could give better returns than a conventional SIP. Those who have started to invest late in life could start small and gradually increase the amount to generate more wealth.

On the other hand, youngsters or early-stage professionals who have fewer responsibilities and enough time to accumulate wealth may choose step-up SIPs. Compounding works for a longer duration to generate a corpus as salaries rise within shorter spans of time.

Step-up SIPs are not free from risks, since the money goes into the stock market, which does not offer guaranteed returns. Moreover, it requires an income that grows proportionally with the increase in the investment amount, or the SIP may create a burden on the investor. Unforeseen circumstances may also lead to expenditures affecting one’s capacity to invest.

Investment planning requires reflecting on one’s expenditures, goals, circumstances, and the risk one can afford to take in case a loss is incurred. What matters is the decision to invest timely and with consistency, after choosing the track that suits your situation and goals.