Source/Contribution by : NJ Publications
Systematic Investment Plan or SIP as it is commonly known, is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund Scheme periodically at fixed intervals – say once a month instead of making a lump-sum investment. The SIP, as we popularly know it, is the ideal way to invest in mutual funds, especially for retail investors. Over the years, it has proved itself as the preferred and the best way to create long-term wealth, without affecting their day-to-day lives.
The benefits of having a SIP are well-known among investors today and you are not alone. As per the latest available figures from Association of Mutual Funds of India, popularly known as AMFI), an industry body, there are about 2.98 crore or nearly 3 crores SIP accounts in India through which investors regularly invest in Indian Mutual Fund schemes. The SIP method of investing has been gaining immense popularity in the recent years.
AMFI data shows that the mutual fund industry had added, on an average, 9.55 lacs SIP accounts each month during the last financial year (FY2019-20), with an average SIP size of about ₹2,850 per SIP account. Today investors are investing about ₹.8,518 crores per month in mutual funds through SIP route. In April 2016 this figure was only about ₹.3,122 crores. That's a growth of nearly 2.7 times!
The reasons why almost every prudent investor is today thinking of SIP route are multiple. The primary advantage being that helps in Rupee Cost Averaging. In simple terms the Rupee Cost Averaging means that you are investing a fixed amount of money at regular intervals ensuring that you buy more shares of an investment when prices are low and less when they are high. Think of it as buying say gold every month of a fixed amount. As gold prices fluctuate, you will be buying less or more of gold every time. When you do this for a long period of time, your average purchase price of gold per gram or tola will be much lower to the prevalent market prices in future. That leads to better returns over time.
Another reason why people prefer SIPs is because it help in investing in a disciplined manner without worrying about market volatility and timing the market. SIP also offer great convenience. The SIP instalment amount could be as small as ₹500 per month. There is also the option of choosing the right frequency – say weekly, monthly or quarter and also the preferred SIP date from the multiple date options given by fund houses. As compared to lump sum investment directly in an equity fund at any particular date, SIP is better since that risk of market fluctuation is reduced. However, this is subject to market conditions and also individual investment horizon.
What is Step-Up SIP and why is it needed?
Step-up SIP, also popularly known as top-up SIP, is an automated facility through which SIP contribution can be increased by a predetermined fixed amount, or a fixed percentage, at periodic intervals. Thus, with a step-up SIP, the SIP amount increases automatically at a pre-defined rate and period. For example, a person who is investing ₹10,000 every month via a SIP can opt for a step-up plan and ask the fund house to increase his SIP amount by say Rs.1,000 every year.
In a normal SIP done today, of say Rs.10,000, will remain at Rs.10,000 even after say 5 or 10 years. But during this time your savings potential and your goals /aspirations would have also increased. Since most people are too lazy, to voluntarily increase their SIP investment contributions very year, their SIP contributions will likely remain stagnant. They would fail to integrate their income growth with their investment plan. And one fine day the investor will realise that he has lost on the golden opportunity to save more through SIP in past so many years. This is where step-up SIP steps in as an automated function and facilitates long-term wealth creation. Over time, as your circumstances change and your income grows, you are likely to have more money available to invest. The step-up SIP will take care of your growing savings potential and evolving financial goals with time.
In short, if you continue investing with a fixed SIP amount, then you are not taking a wise move and loosing out on the wealth creation opportunity in equities in long term. You need to opt for a Step-up SIP.
SIP Step-up can be done quarterly, half-yearly or annually. It can also be planned as a fixed amount of increase or a fixed percentage of SIP amount. For example, you can either increase it by say Rs.5,000 every half year or say 10% every year. The increase in the SIP amount should ideally is based on your expected rise in income and your requirement for achieving your financial goals. Just to add, even big financial goals, which look unachievable today or command very high fixed SIP amount today, can be expected to be achieved with a smaller but a rising SIP. A Step-up SIP is necessary to fulfil goals faster, with a bigger corpus than planned and also get returns that counter inflation.
Why much can I benefit?
Step-up SIP incorporates the power of compounding so that the investors can reach their financial goals sooner. It works wonderfully well in long term. Here is a simple comparison for how much wealth can be potentially created with step-up SIP. We consider that the starting SIP is of Rs.10,000 monthly and the expected returns is of 12% annualised. Step up
|Estimated future value (Rs.)||Investment Horizon|
|10 years||20 years||30 years|
|Normal /fixed SIP||~ 22.4 lakhs||~ 92 lakhs||~ 3.08 crores|
|Step-SIP percentage (annual) - 5%||~ 26.9 lakhs||~ 1.28 crores||~ 4.68 crores|
|Step-SIP percentage (annual) - 10%||~ 32.7 lakhs||~ 1.87 crores||~ 7.99 crores|
As you can clearly see, the step-up SIP can greatly benefit wealth creation and will give compounded benefits especially over long term. The difference over a normal fixed SIP is staggering in long term.
Just to summarise, topping up an SIP offers the following advantages:
- Adapts to your rising income - you can plan an increase in SIP in line with your income and savings potential increase every year - either in fixed amount or percentage. We would prefer you decide on a fixed percentage rather than an amount.
- Achieve goals faster - step up SIP would bring big financial goals within your reach and/or help them achieve faster.
- Helps fight inflation - Many investors choose to increase their contributions to stay in line with inflation. As inflation consistently erodes the value of your money it may be wise to raise contributions to an investment plan for the long-term.
- Allows you to keep investing in an existing plan rather than open a new one - This facility also saves you from the hassle of managing multiple SIPs. A rise in income need to be systematically invested. But looking for a new investment opportunity is tedious and time-consuming. Instead, topping up an existing investment could be the most efficient option.
How to start Step-up SIP?
SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time. The step-up SIP works in similar fashion. While starting a new SIP, an investor can choose the step-up option. While completing the form, the investor is required to enter the initial amount, step-up amount, step-up frequency. This is operationally very convenient and easy so let us not bother too much about same.
However, we would suggest that you talk to your financial advisor /mutual fund distributor today on your financial goals and your investment plans to not only start a normal SIP but a step-up SIP.