How to beat inflation through step-up SIPs?

Top-up SIPs
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Think of step-up Systematic Investment Plans (SIPs) as a fitness journey for your finances. Just as you gradually increase the intensity of your workout, step-up SIPs allow you to gradually increase your investment contributions. It’s like strengthening your financial muscles over time, ensuring that your wealth-building program continues to challenge you and push you towards your financial goals. So, pump up those investment gains and flex your way to financial fitness with Step-Up SIPs!

Continue reading to learn more about step-up SIP and its benefits.

What is a SIP?

An SIP is one of the most viable methods of investing in mutual funds. It allows you to invest a fixed amount in a selected scheme at regular intervals instead of a one-time investment. The investment amount can be as little as Rs 500, while the intervals can be weekly, monthly, quarterly, semi-annually, or annually. By investing in an SIP, you can achieve your financial goals in a disciplined manner and benefit from the power of compounding.

What is a step-up SIP?

A step-up SIP, also known as a top-up SIP, is a facility that enables you to increase your SIP’s investment amount by a fixed percentage or sum at predefined intervals as your needs change and your income rises. The predefined intervals may be quarterly, semi-annually, or annually.

Stepping up your SIP with time can offer greater returns over a period and help you achieve your goals without putting an extra burden on your pocket.

Let’s look at some of the most frequently asked questions about Step up SIPs.

  1. Why consider step-up SIPs?

Consider Step-Up SIPs to step up your investment strategy. Step-Up SIPs allow you to align your investments with your financial journey by gradually increasing your investment contributions as your income grows. It’s a smart way to stay ahead of inflation and work towards your goals. By consistently increasing your investments, you can potentially benefit from cost averaging in Rupees and maximise returns over the long term. Step-up SIPs offer flexibility, discipline and the opportunity to achieve a higher level of wealth accumulation.

  • How do traditional SIP and step-up SIP differ? 

A regular SIP does not allow you to increase the periodic contributions throughout the plan. This means you have to start with a new plan every time you want to add more money to your SIP investment. However, a step-up SIP allows you to invest your higher earnings in your current SIP without starting afresh.

To understand the difference between a regular SIP and a step-up SIP, consider the following example:

Ram and Rahul are two friends who decided to invest Rs 5000 every month in a mutual fund scheme through a SIP. However, Ram opted for a step-up feature and decided to increase his contribution by 10% every year, while Rahul opted for a regular plan.

Suppose the investment horizon is ten years while the assumed rate of return is 12%. After ten years, Ram’s total investment value rises to Rs 15,92,415 while Rahul’s investment value is Rs 11,61,695.

Investment detailsRamRahul
Monthly contributionRs 5000Rs 5000
Annual step-up10%
SIP tenure10 years10 years
Assumed Rate of return*12%12%
Amount investedRs 9,56, 245Rs 6,00,000
Estimated returnsRs 6,36,170Rs 5,61,695
Total value of the investmentRs 15,92,415Rs 11,61,695
*The above calculation is for illustration purposes only.

It is clear from the above example that stepping up your SIP can help generate higher returns and build a larger wealth corpus over a regular SIP.

  • How do step-up SIPs help beat inflation?

Inflation can erode the purchasing power of your investment returns. The amount that seems sufficient today may fall short of achieving your goals after a few years. Hence, inflation-beating returns are an essential factor to consider while investing. A top-up SIP allows you to increase your investment in accordance with the rise in your income or savings. This helps ensure your investments or savings are in tandem with the inflation or cost of living, so you achieve your financial goals effectively.

A step-up SIP offers immense benefits over a traditional SIP.  It allows you to manage your finances better without starting a new SIP for every goal. With every annual hike, bonus, increment or reduction in expenses, you can step up your SIP and let the power of compounding do its wonders. This will ensure your savings are in line with inflation and are sufficient to achieve your financial goals.

So, remember to opt for a step-up facility while enrolling for a SIP. Even a small top-up amount can make a huge difference in accelerating your wealth build-up and journey towards your dreams.

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