SIP investments are designed to provide a secondary income to investors, while giving them a safety net to fall back to if a financial crisis ever occurs. They also provide you enough financial power after your retirement if you invest in SIPs diligently.
While starting your SIP investment journey early is a milestone in itself, making the same amount of investment every year may not make you maximise your gains to the full potential. According to CA Nitin Kaushik, who posted on X regarding the same, an annual SIP step-up is the only way to make your investments.
Let us see how step-up in SIP works, as per the CA’s example.
How step-up in SIP helps
“An annual 10% STEP-UP is the only mathematical savior for a small SIP,” CA Nitin Kaushik wrote.
He also gave an example.
If you start an SIP of ₹2,000 as monthly investment at the age of 25, it will yield a value of roughly ₹70.6 lakh by age 55, assuming that you get a 12% return. However, according to the CA, an inflation of 6% “guts that future value to just ₹12.3 lakhs in today’s purchasing power.”
This means that your investments will not yield as much as you expect, if you consider the inflation factor.
However, stepping up your SIP investment will change everything.
Increasing your monthly SIP investment by 10% every year will shift the final corpus by miles. According to CA Nitin Kaushik, you may get an yield of ₹2.17 crore, “transforming a stagnant hobby into a functional retirement fund.”
Why SIP step-up works?
According to CA Nitin Kaushik, step-up in SIP works because you increase your principal every year along with your career growth. This prevents lifestyle inflation from destroying the most productive decades of compounding.
“Consistency is a baseline requirement, but without scaling the input, time alone cannot fix a low starting point,” Kaushik says.
You can increase your contributions to an SIP at regular intervals by a fixed rate or a fixed amount. This way, you enhance the benefits of compounding, while maintaining a strict financial discipline.
What is a step-up SIP?
A step-up SIP is an investment strategy where you increase your SIP contributions in mutual funds by a fixed amount or percentage at regular intervals, for example every year. A step-up SIP allows you to implement a planned increase to your investments, often aligned with your growth in your career.
This strategy also enables you to adjust your financial investments as economic situation evolves, making it easier to reach your financial goals.
Who should invest in SIP?
SIPs can be started by anyone over the age of 18 by opening a demat account. SIPs are especially suitable for —
- New investors who are still finding out a way to manage markets and get the most out of them,
- Individuals with a steady source of income to keep investing at regular intervals.
- Individuals who seek decent returns without having to worry about high volatility.
- Investors who want to pursue a long-term investment goal.
- Step-up SIPs allow investors to increase their monthly contributions periodically, maximizing compounding benefits.
- Adjusting SIP contributions in line with income growth can help counteract lifestyle inflation.
- Starting SIPs early and incorporating step-ups can significantly enhance retirement savings.