Appraisal season is here, and your employer may have given you a salary hike and/or a performance bonus.

While you may be looking to set aside a portion of the extra income earned on splurging a bit and treating yourself, you may also be looking at ways to let your hard-earned money grow manifold.

Thus, a healthy financial practice would be to invest a portion of the extra money in equity mutual fund schemes. If you already have invested in mutual funds, you may consider raising the contribution via the Step-up SIP feature to get a more sizeable corpus in the future.

[Read: 5 key benefits of investing in mutual funds through SIPs]

What is Step-up SIP?

A Step-up SIP, also known as Top-up SIP, is a facility that allows you to automatically increase your SIP contribution after a certain period.

Investors have the option to either increase the SIP by a certain fixed percentage, such as 10%, or by a fixed amount, such as Rs 500. They can also select the interval at which they can increase the SIP instalment such as 6 months or 1 year.

The step-up percentage/amount can vary from scheme to scheme, while the increase in contribution can be done either in a new scheme or an existing one. Investors can also set an upper limit on the amount so that the hike in SIP contribution does not exceed the set investment budget.

A performance appraisal is the best time to do so, as you may receive a salary hike and/or bonus. Investors may opt to increase their monthly SIP instalment in line with the increase in income. The expenses may not necessarily rise on par with the income, which will allow you to make the additional investment.

So, if you wish to increase your wealth exponentially, increasing your SIP contribution every year could prove beneficial.

Consider this example:

Riya and Priya are two friends who started an investment of Rs 5,000 on a monthly basis in the same mutual fund scheme via the Systematic Investment Plan, i.e. (SIP).

At the time of investment, Riya opted for the Step-up facility of her SIP, which meant she could increase her SIP contribution year after year by a fixed amount or percentage. She registered to increase her contribution by 10% every year.

Priya, on the other hand, wasn’t sure about registering for the Step-up option and chose not to do so.

After 10 years, assuming an annual rate of return of 12%, Riya’s corpus will grow to Rs 16.9 lakh, while that of Priya will grow to Rs 11.6 lakh.

That is a difference of around Rs 5 lakh!

If we calculate the same for a period of 20 years, Riya’s corpus will grow to Rs 99.4 lakh, and Priya’s corpus will grow close to Rs 50 lakh.

Within a span of 20 years, Riya’s wealth will nearly double compared to that of Priya.

This is the incredible benefit of Step-up SIP.

The table below explains how the Step-up SIP calculation works. As we can see with every hike in SIP contributions annually, the value at the end of the year too grows substantially.

Step-up SIP Calculation

For illustration purpose only
Annual rate of return assumed at 12% CAGR
(Source: PersonalFN Research) 

How to start a Step-up SIP?

For Step-up SIP, choose the best mutual fund scheme/s that align with your investment objective and risk profile. Investors can consider Step-up SIP in a diverse basket of sub-categories such as Large Cap FundsFlexi Cap FundsMid Cap FundsValue FundsAggressive Hybrid Funds, etc. You may also consider Step-up SIP in ELSS, which can help you create wealth and also help you save tax (subject to a maximum limit of Rs 1.5 lakh in a financial year).

The next step is to fill out the top-up application form, which can be done offline or online. In the form, select the step-up/top-up SIP option, specify the initial amount (in case of new investment), step-up amount/percentage, step-up frequency (usually half-yearly or yearly), and the duration/ maximum amount in the respective columns.

What are the key benefits of Step-up SIP?

Here are the key benefits of stepping up your SIP instalment:

1) Facilitates building a bigger corpus

Firstly, Step-up SIP facilitates building a bigger corpus

When you step up your SIP instalment, it adds to the power of compounding, and the potential return enables you to build a bigger corpus to accomplish your future financial goals.

If you wish to grow your investment corpus remarkably at the end of the goal period, increase your monthly SIP instalment annually. Even a small increase now can make a big difference in the long term.

The graphic explains how different levels of a percentage hike in monthly SIP annually will grow your wealth over 20 years, considering a starting monthly SIP instalment of Rs 5,000 in the first year and assuming an annual rate of return of 12%.

As we can see in the graphic below, if you hike the SIP contributions even by 5% or 10%, the amount at the end of tenure will be significantly higher.

How increasing SIP instalment every year enriches the power of compounding…

(For illustration purpose only) 

2) Counters inflation

Step-up SIP helps you counter inflation.

Earning an effective real rate of return, or to put it simply, returns adjusted for inflation, is an important factor to be considered while investing. Countering inflation helps you achieve your financial goals comfortably, which otherwise erodes the purchasing power of your hard-earned money.

Since inflation increases every year, the amount that seems substantial today will not have the same value a few years down the line.

By increasing your monthly contribution every year, Step-up SIP leads to an overall increase in wealth, which in turn helps you to beat inflation.

3) Helps achieve the envisioned goals faster

Step-up SIP enables you to achieve the envisioned goals faster

By increasing your contribution every year, you may be able to achieve your goals faster than expected. For example, by increasing your SIP by 20% every year, you may be able to plan an early retirement.

However, this will also depend on conditions like, by how much you decide to step up your SIP instalment, the type of schemes that you choose, and the amount required to fulfil the goal.

4) Ensures focused planning

Finally, Step-up SIP ensures focused planning because instead of investing in new mutual fund schemes to take advantage of the market correction, you can consider increasing SIP contributions in the schemes in your existing portfolio that may be doing well.

This makes it easier to manage and monitor the progress of your portfolio, which is necessary to maximise wealth.

What are the key points to remember when stepping up SIP?

Now that you have learned the importance of Step-up SIP, it is important to note certain points to get the best out of your investment:

Firstly, make sure that you select schemes that align with your financial goals, risk profile, and investment objective. Secondly, invest the right amount by quantifying your goals and assessing the time horizon before the goal befalls. And finally, invest regularly irrespective of the market conditions until your goal is achieved.

Note that the equity market witnesses various events throughout the year. Most of these events do not have any long-term impact on the indices.

Therefore, when the markets turn volatile, investors should avoid the mistake of discontinuing or redeeming the investments because your SIP investment can always reward you with noteworthy returns in the long run.

It is important to have a long-term investment horizon of five to seven years or more, even if you are investing via a SIP.

During certain periods, SIP returns may be a few percentage points lower compared to a lumpsum investment, but over a period, it will still be sufficient to meet your financial goals.

That said, if you are nearing your goal horizon, gradually reduce exposure to equity mutual funds to invest in a more stable and less risky investment avenue, such as debt mutual funds and bank deposits.

If your personal circumstances undergo a significant change and the current financial objective no longer aligns with your investment, you have the option to pause SIP for a maximum period of three months or you can even stop the Step-up SIP.

By leveraging these options, you will not only continue to earn returns on your accumulated funds but also restart the SIP investments at a later date.

Watch this video to find out how Step-up Mutual Fund SIP can help you achieve your financial goals faster:

This article first appeared on PersonalFN here

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