Wealth Creation: What is SIP step-up strategy and how you can use it to reach financial goals faster?

SIP step-up strategy: Systematic Investment Plan or SIP is one of the most convenient and effective methods to invest in mutual funds. This feature in mutual funds helps investors in planning their financial goals and slowly working towards them. There are various strategies used while investing through SIP — one of them being step-up strategy. 

What is a SIP step-up strategy? 

A step-up SIP entails automatically increasing monthly SIP contributions on a periodic basis. According to Tanvi Kanchan, Head Corporate Strategy at Anand Rathi Shares and Stock Brokers, with a ‘Step up SIP’ strategy or a ‘Top Up SIP’ plan, investors can gain the benefit of increasing their contribution in SIPs, either by a fixed percentage or a fixed amount. 

She added that investors can do this in line with their current income, expected yearly increments, and financial goals. This lays down a set plan for the investor to reach the predetermined investing amount over a period of time and increase their investments in a systematic manner.

How does SIP step-up strategy work? 

For example, if an investor starts with a monthly SIP of Rs 5000 with an annual step-up of 10 per cent, at an expected rate of return of 12 per cent and an investment horizon of 10 years:

That is the impact of systematic investments and gradual increase in the same.

According to Tanvi, investors can also put a cap on the maximum amount they wish to invest per month. For instance, if an investor's current SIP is Rs 5000 per month, then they can define in the step-up SIP plan that they wish to step up the monthly investments in SIP to Rs 10,000 per month. So, as soon as the step-up plan reaches this amount, it stops adding any further and the normal SIP amount continues.

When is the right time to step up the SIP?

According to experts, these are the best times to step up the SIP: 

-Post-appraisal time 

-When there is an increase in compensation or reduction in expenses 

-When markets are going through a bad phase  

“Increasing your monthly SIP installment in proportion to investors’ income boost is wise, especially if their expenses are yet to increase correspondingly,” said Varun Girilal, Managing Partner at Scripbox.

Also Read: Taxpayers Alert: These 10 income tax changes will be applicable from April 1

How does SIP step-up strategy benefit investors?

Experts believe that following are the benefits of the SIP step-up strategy:

-Getting inflation-beating returns

-Building a more substantial investment corpus to achieve future financial objectives.

-Achieve your goals sooner than anticipated

-Helps in translating increased earnings into their already ongoing SIPs

He believes that increasing the SIP amount by 10 per cent for a 15-year investing period can help investors get a corpus that is 70 per cent higher for the same time frame of 15 years of SIP investing. 

What are the drawbacks of SIP step-up strategy?

- Increased complexity: The SIP step-up strategy requires more planning and preparation than a standard SIP strategy because investors must periodically change the amount of their investment.

- Higher costs: Depending on the investment product used for the SIP, higher investment amounts may attract higher fees, leading to increased costs.

- Market timing risk: The SIP step-up strategy is dependent on the market continuing its upward trend; but, if the market experiences a downturn, then the investors may compound their losses by increasing their investment in a market slump.

- Behavioral biases: Investors may be tempted to stop or reduce their investments during market downturns, which could lead them to miss out on potential gains in the long run.

- Limited liquidity: The SIP step-up strategy typically involves committing to regular investments over a set period of time, which can limit liquidity and flexibility in the short term.

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