Rs 12,000 SIP vs Rs 5,000 step up SIP: Which can create higher retirement corpus in long term; see calculations to know it
SIP vs Step up SIP: Monthly investment remains constant in a simple SIP from the beginning till the end, while in a step up SIP, one can increase their investment amount every six months or a year based on a rise in their income. Investors can use both SIP and step up SIP for retirement planning.
SIP vs Step up SIP: How does retirement planning work? You set a retirement goal and make investments to achieve that. The goal and the investment amount should be in sync, and a proper investment strategy should be in place so that it can help you meet all your retirement goals. After that, the retirement corpus should be large enough to help you bear expenses for the rest of your life. It means it is good if one starts their journey with a substantial monthly or lump sum investment. But for the large population that lives on a monthly pay cheque, starting an investment with a large amount is not possible as their savings are not that much. But a better way is to start investing early, no matter how small the amount is. As the monthly income rises, the investment amount can be increased gradually. Amid such a backdrop, the importance of a step up SIP comes to the fore.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for retirement planning.)
What is simple SIP?
In a simple SIP, you decide a monthly investment amount for a periodic investment cycle. You do not increase the investment amount for the entire duration of the investment. The impact of a simple SIP may not be evident in the short term, but in the long term, it can do wonders because of the power of compounding.
Example of simple SIP investment
If someone starts a Rs 5,000 monthly SIP investment and gets 12 per cent annualised return on it, their estimated corpus in 15 years will be Rs 25,22,880 on a Rs 9,00,000 investment, but if they continue it for another 15 years, the estimated corpus will swell to Rs 1,76,49,569.
Example of simple SIP investment
Similarly, if one invests Rs 2,000 monthly through a SIP in a mutual fund for 20 years, their estimated corpus in that period will be Rs 19,98,296, but if they continue it for another 20 years, the estimated corpus will be Rs 2,37,64,840.
What is step up?
In a step up SIP, the investor periodically increases their investment amount. It can be half-yearly or yearly. The increase can be 5 per cent, 10 per cent, or as per their income increase. The step up SIP is suitable for investors expecting a gradual rise in their income. When the investor increases their monthly SIP amount, they can also create the same size of corpus as a person who begins SIP investment with a comparatively much larger amount can.
Step up can be synced with income
The special thing about the step up SIP is that an investor can sync it with their income. As the income increases because of salary increment, job change, or bonus, the person can also increase their investment amount.
Example of step up SIP
A person starts their investment journey with a Rs 2,000 monthly SIP and decides to increase their investment amount by 10 per cent every year, in 20 years, their estimated corpus will be Rs 39,77,743 on estimated investment of Rs 13,74,600, but if they continue the same investment for another 20 years, their estimated corpus will be Rs 7,00,88,047 on a total investment of Rs 1,06,22,221.
Corpus from Rs 12,000 monthly SIP in 30 years
We will calculate a Rs 12,000 monthly SIP investment for 30 years at a 12 per cent annualised return.
Corpus from Rs 12,000 monthly SIP in 30 years
The total investment will be Rs 43,20,000. Estimated capital gains will be Rs 3,80,38,965, and the estimated corpus will be Rs 4,23,58,965.
Corpus from Rs 5,000 monthly step up SIP in 30 years
Here, the investor will begin with a Rs 5,000 monthly investment and will increase their investment by 10 per cent annually. The investment period is 30 years.
Corpus from Rs 5,000 monthly step up SIP in 30 years
The invested amount in 30 years will be Rs 98,69,641; estimated capital gains will be Rs 3,43,00,976, and the estimated corpus will be Rs 4,41,70,618.