Stepup Sip
Besides regular sip investments, there’s something called as
Stepup Sip.
A Stepup Sip is an avenue via which your sip amount
increases periodically either via a fixed percentage or amount.
Unlike a traditional SIP investment you will have to mention
the fixed percentage or amount prior to starting a Stepup Sip and the entire
process is automated.
A Stepup Sip gives you the facility to increase your sip
amount at a pre-determined date and thereby not allowing procrastinating to set
in.
While a regular sip investment is a very convenient and
affordable manner by which you can achieve your financial goals, adding to them
periodically is the need of the hour.
Rising expenses, erosion of rupee, multiple life goals,
etc. have all made an addition to your regular sip investment a nice and
comfortable option to resort to.
It is always better to have it and not need it than to need
it and not have it.
When to stick with a Regular
SIP Investment
You can consider sticking with your regular sip investment
under the following conditions:
If you do not expect an annual increase in your income.
If you prefer periodic lumpsum investments over increasing
your systematic investment plan.
If you have immediate goals and thereby cannot budget for
equity investments.
If you are in an unstable job situation and thereby not sure
about your future income.
When to consider
Stepup sip
You can consider stepup sip
under the following conditions:
If you are worried about being unable to counter lifestyle
inflation and would prefer to redirect your money to better use.
If you are confident about your salary rising annually.
If you are investing keeping in mind long term goals and not
short term wants.
If you are disciplined about savings and investing and would
prefer an automated mode to increase your investments so as to keep up with
inflation.
Stepup sip versus
Regular Sip investment
The obvious advantage that a stepup sip has over a regular
sip investment is that in the former you are able to reach your goals faster
due to the increase in investment amount.
Besides that there are other benefits as stated below:
Discipline
Investments are not exactly the first thing that pops up in
one’s mind when you think of money.
There are other non - discretionary expenses in the form of
rent, grocery, emi’s, etc. along with other leisurely expenses.
So one might not automatically increase their sip amount
with a rise in income since they have other priorities.
Having a stepup sip ensures that you increase your sip
investment annually and thereby not letting it be an afterthought.
Helps in having a
Focused portfolio
Often investors who rely on social media and do not avail
the services of a qualified professional, end up accumulating funds in their
mutual fund portfolio instead of aligning them to a goal.
This is caused by a fear of missing out on the latest fad,
funds that have recently done well along with the recent theme in vogue.
Having a stepup sip helps negate this issue to a certain
extent cause you are further investing in the same fund.
You can still consider other funds as long as they make
sense to your mutual fund portfolio but having a stepup sip ensures you do not
go around shopping merely cause you can.
How to
increase your Sip Investment?
You have two options via which you can increase your SIPs,
amount or percentage.
Amount
Under this method you simply increase your sip amount by a
fixed amount each year.
For example, let’s say you start your sip journey with an
amount of 10,000.
You then add an additional fixed 2,000 each passing year.
The table below explains in detail how this would work
assuming an initial sip amount of 10,000 with an additional 2,000 every passing
year.
Percentage
Under this method you increase your sip amount by a fixed
percentage each year.
For example, let’s say you start your sip journey with an
amount of 10,000.
You then add an additional 10% of the sip amount each year.
The table below explains in detail how this would work
assuming an initial sip amount of 10,000 with an additional 10% every passing
year.
With regards to which method is better, it totally depends
on what works for you after considering all the available points that can and
should be considered.
Ideally though, the method that is closer to reflecting your
rise in income should be preferred.
Difference
between Regular SIP Investment & Stepup SIP
The table below illustrates the difference between a regular
SIP investment and a stepup sip.
In the table above we have considered a Stepup rate of 10%
for Gita while the SIP contribution for Sita remains constant which is why we
see a difference of 8,35,626 between the
two in terms of the final valuation.
Do note that these are merely assumptions and there is no
guarantee of future returns.
Both the regular sip investment and the stepup sip have
their pros and limitations.
While the regular sip investment is easier for a beginner to
understand, the stepup sip might be a bit complex to manage since the amount is
not fixed.
Your final decision will be dependent on several factors
like expected income growth, life goals, time horizon, etc.
Irrespective of the choice you make, what is paramount is
that you have a running sip that is untouched till your goals are achieved.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
