SIP is a way to invest in mutual funds using fixed amount over a period of time, where as step up SIP or modified SIP is a way to increase your SIP amount every year based on increase in your income with help of promotions, bonus, salary increments, etc. This increase in SIP amount via step up SIP helps to achieve your financial goal faster compared to the normal SIP where you invest fixed amount over long term.
Let us understand more details about SIP vs Step up SIP.
SIP vs Step up SIP Returns Calculation Video
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Above vide helps you to understand the returns on SIP and Step up SIP for same tenure, in which case step up SIP helps us to achieve our financial goals before time.
Benefits of SIP
- SIP full form is Systematic Investment Plan, which helps you to invest a specific amount consistently over long period in mutual funds or stocks
- This investment need to be aligned with your long term financial goals of at least 7 to 10 years
- You financial goal of long term can be to buy a new house, child’s education or any other goal that would take you minimum 7 to 10 years
- We have seen historically that Index mutual funds have given almost 12% returns on average for past 15 to 20 years
- Considering such returns, SIP can help you to gradually invest in mutual funds and move closer towards your financial goals
- But this SIP is a fixed amount that will help you to move towards your goal slowly. With time, as your income increases, you should also increase the Investment amount, and here is where we use step up SIP discussed below.
ALSO READ: Rs. 1000 SIP returns Calculation for 15 Years
Benefits of Step up SIP (Modified SIP)
- Step up SIP or Modified SIP is a way to increase your SIP amount after every year based on the increase in your income
- If you are a salaried employee, you get salary increment based on your performance, bonus or promotions, in which case your monthly income increases
- This increase in monthly income can help you invest extra via SIP, instead of using the extra income in extra expenses
- Here you need to be careful not to let your monthly expenses go out of hand, but instead use the extra income to contribute towards your investments
Why to use Step up SIP
Simple answer is to reach your financial goal before time and let money work for you and earn extra money. Let’s understand this using the table below where we do some mathematics in terms of percentages:
| Portfolio Amount | Monthly Returns % | Profits Made |
|---|---|---|
| Rs. 10,000 | 1% | Rs. 100 |
| Rs. 1,00,000 | 1% | Rs. 1000 |
| Rs. 10,00,000 | 1% | Rs. 10,000 |
| Rs. 1,00,00,000 | 1% | Rs. 1,00,000 |
| Rs. 5,00,00,000 | 1% | Rs. 5,00,000 |
As seen in above table, if you earn 1% monthly return on your Rs. 1 lakh of portfolio, your profit is Rs. 1000. But in case you have Rs. 1 crore during that same time in your portfolio, your profit amount is Rs. 1 lakh which is very huge compared to profits made on Rs. 1 lakh.
This simple mathematics proves that we should be reaching the goal of 1 crore or 5 crore or any other amount to get enough profits from financial markets that we should not be relying on our active income. This profit made will be our passive income we can use to cover our expenses.
For this reason, we should be using step up SIP to reach such goals faster and than get good amount of profits on same returns % for everyone.
Watch below video to understand Step up SIP Returns Calculation:
Why Step up SIP is better than SIP
There are multiple Reasons why step up SIP is better than normal SIP:
- Achieve Goals before time: You can achieve your financial goal of let’s say 10 years within 7 years, simply by increasing the SIP amount every year. In this case you only increase the SIP amount every year when you get extra income due to increment or promotions
- Get Better Returns: Step up SIP helps to get better returns over long term compared to normal SIP mainly due to the increase in SIP amount. This can also help to achieve your goals faster
- Retire Early: FIRE (Financial Independence and Retire Early) is the term used for getting financial independence and retire to achieve other life goals. Step up SIP can help you FIRE if you are aggressive during your 20s and 30s while doing step up SIP over long term
ALSO READ: Retirement Calculator in Excel
How to maximize returns using Step up SIP
You can maximize the returns using 2 important factors:
- Increase Returns Rate: This will need to carefully search for best mutual funds in order to get higher returns compared to other mutual funds with average returns. Small cap and mid cap mutual funds can provide you higher returns over long term compared to large cap mutual fund, but they have extra risk associated with them
- Increase Portfolio Amount: A higher portfolio amount can help you to get good returns over small increase in the returns rate. So you should be increasing your portfolio amount as soon as possible to get better benefits on returns rate.
Can I convert my SIP to step up SIP?
Yes, many AMCs (Asset Management Company) allows you to increase the SIP amount every year based on the increase in income due to promotions, increments, bonus, etc. So you can easily opt for step up SIP online via your broker or AMC
Conclusion
So step up SIP or modified SIP helps you to provide better returns compared to normal SIP. The simple reason is, due to increase in the deposit amount, the returns on step up SIP will also increase and also your portfolio amount will increase.
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