Step Up SIP v/s SIP Investment

In this article, we will discuss

• Regular Systematic Investment Plan
• Step-up Systematic Investment Plan
• Regular vs Step-Up Systematic Investment Plans: An Example
• Regular vs Step-Up Systematic Investment Plans: The Key Differences
• Top Reasons to Opt for a Step-Up SIP
• Regular vs Step-Up Systematic Investment Plans: Which One to Choose?
• Conclusion

A Systematic Investment Plan (SIP) is an effective way to invest in market-linked assets like stocks and mutual funds. It offers a more rewarding alternative to investing a lump sum amount in one go. While lump sum investments are certainly better than having the amount sitting idly in your account, they do not offer many of the benefits that come with SIP investments — like rupee cost averaging, disciplined investing, the power of compounding and above all, the benefit of riding out market volatility. 

That said, identifying the best SIP for long-term investments can be challenging. Should you invest the same amount each year or should you change the amount invested? In other words, should you choose a static SIP or a step-up SIP? Let us discuss what these two strategies entail and see how they compare against one another, so you can make an informed choice. 

Regular Systematic Investment Plan

A regular Systematic Investment Plan is a method of periodically investing in stocks or mutual funds. Here, you invest the same fixed sum at regular intervals over a defined period. The frequency of investments can be monthly or quarterly. Some assets also support daily SIPs. 

The minimum amount to be invested in each instalment starts as low as Rs. 500. With micro SIPs, you can even start investing with just Rs. 100. However, the amount invested in each instalment is fixed and does not change over the investment tenure. This is why a regular SIP is also known as a static SIP. 

Step-Up Systematic Investment Plan

A step-up SIP, on the other hand, is precisely what it sounds like. It allows you to steadily increase the amount you invest in your preferred stocks or mutual funds at periodic intervals. The amount of increase in SIP instalments may be allowed on a percentage basis or as a fixed amount. 

For instance, say you decide to invest in a mutual fund via a step-up SIP. In the first year, you invest Rs. 1,000 per month. Thereafter, you can use the step-up facility to increase your SIP instalments by 10% annually (thereby taking them up to Rs. 1,100 per month in the second year, Rs. 1,210 per month in the third year and so on). 

Alternatively, you can also increase your SIPs by a fixed sum periodically. So, let’s say you invest Rs. 1,000 per month now and wish to increase it by Rs. 1,000 annually. This means you will invest Rs. 2,000 per month in the second year, Rs. 3,000 per month in the third year and so on). 

Regular vs Step-Up Systematic Investment Plans: An Example

To better understand how regular SIP investments and step-up plans work, let us discuss a hypothetical example outlining each strategy. This will help you better understand which is the best SIP investment plan for your financial situation. 

Say you want to compare a static SIP investment and a step-up SIP over a period of 10 years. For this example, let's assume the following:

• Initial monthly investment: Rs. 10,000
• Step-up rate for the step-up SIP: 10% per year
• Average annual return: 12%
• Investment period: 10 years

Here is how the investments may pan out if the above data holds true.

This means that after 10 years, the step-up SIP results in a significantly larger corpus that is higher than the regular SIP’s corpus by over 45%. Also, while the step-up SIP earns over 30% more than the regular SIP, it requires an investment that is 59.30% higher. This means you need to weigh both risks and rewards to better assess which is the best SIP for the long term for your specific financial needs and capabilities. 

Regular vs Step-Up Systematic Investment Plans: The Key Differences

Now that you have seen how both these SIPs compare in terms of potential results, let us take a deep dive into their key differences. This will help you understand the nuances of both investment strategies. 

As you can see, both regular SIPs and step-up SIPs are vastly different from one another. Before you decide which is the best SIP to invest in, make sure you factor in all these aspects.

Top Reasons to Opt for a Step-Up SIP

Step-up SIPs can be advantageous in many ways. If you think you can afford the rising annual investments, here are the top reasons you may want to consider starting a SIP of this type. 

• Automatic Income Growth Alignment

A step-up SIP increases your investment amount each year, typically by a fixed percentage. This mirrors the natural progression of your income. You don't have to manually adjust your SIP amount each time you get a raise — the step-up feature does it for you, making it easier to maintain a consistent savings rate as your income grows. As you advance in your career and earn more, your SIP investments grow alongside and ensure that your investments keep pace with your earning potential. 

• A Hedge Against Inflation 

Regular SIP investments might be affected by reduced purchasing power over time due to inflation. Step-up SIPs counter this by increasing your investment amount annually. This means you're not just investing the same amount year after year while everything gets more expensive. Instead, your growing contributions help maintain the real value of your investments against rising prices. This gives your money a yearly boost to keep up with the increasing cost of living and helps ensure your future goals don't get eroded by inflation.

• Accelerated Wealth Creation

With a step-up SIP, you can benefit from accelerated compounding. Each year, as your contribution increases, you're putting more money to work in the market. This higher investment amount, combined with the power of compounding, can significantly accelerate your wealth creation compared to a regular SIP. Over the long term, even small annual increases can lead to a substantially larger corpus. 

• Life Stage Planning

Step-up SIPs are particularly well-suited for long-term goals that require increasing amounts of money. For instance, as your children grow, their education expenses will likely increase. A step-up SIP for their education fund naturally aligns with this growing need. Similarly, as you get closer to retirement, you might want to increase your savings rate. The step-up feature automatically builds this increasing savings pattern into your investment strategy, making it easier to meet evolving financial needs at different life stages.

• Flexibility and Disciplined Investing

While step-up SIPs increase automatically, you still have control over the rate of increase. You can set it to match your expected salary hikes or adjust it based on your financial situation. This flexibility, combined with the discipline of automatic increases, gives you the best of both worlds. You can remain committed to growing your investments and also simultaneously tailor the growth rate to your circumstances. If your income grows more than expected, you can always top up your investments manually or start a new SIP. 

Regular vs Step-Up Systematic Investment Plans: Which One to Choose?

A step-up SIP undoubtedly has many benefits to offer. However, if you are still confused about which of these two investment strategies to choose, here is a handy guide to help you make a smart choice. 

You can choose a regular SIP if:

• You have a fixed income with no expected increases in the near future
• You prefer a simple and straightforward investment approach
• You are on a tight budget and cannot commit to future increases in your investment
• You are nearing retirement and want to maintain a steady investment amount
• You are new to investing and want to start with a consistent and easy-to-understand plan
• You have other investment vehicles for handling increased savings in the future
• You are investing for a short-term goal with a fixed target amount
• You want to maintain complete control over any increases in your investment amount
• You are uncertain about the stability of your future income 
• You prefer to manually adjust your investment amount based on your financial situation

You can choose a step-up SIP if:

• You expect your income to increase regularly (e.g., annual salary hikes)
• You want your investments to keep pace with inflation automatically
• You are planning for long-term goals with increasing financial requirements
• You are early in your career and anticipate significant income growth
• You want to combat lifestyle inflation by automatically increasing your savings rate
• You are looking to maximise your wealth creation potential over the long term.
• You want to take advantage of the power of compounding with increasing contributions
• You are comfortable with the idea of your investment amount growing over time
• You want to align your investment strategy with your career progression
• You are disciplined about saving but want an automated system to increase your investments

Conclusion

The bottom line is that both regular and step-up investments suit different investors. You can use a SIP calculator to compare the outcomes of both the plans and decide which of these strategies may work best for your portfolio. That said, keep in mind that both regular and step-up SIPs have their merits and limitations. While step-up SIPs offer larger final corpus and align with income growth, they may have a lower wealth ratio. Regular SIPs, however, offer consistency and simplicity. The choice ultimately depends on your financial goals, income trajectory and risk tolerance.

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