Systematic Investment Plan, also known as SIP is a way to invest in mutual funds online. Although investors are thrilled with the various mutual fund benefits offered to them via traditional SIP, there’s one major drawback in this investment style. Regular SIPs assume a constant SIP investment amount for a long period. Investors who are flushed with extra income or bonus or increased salary might wish to invest more over time. Fret not, there’s a way to deal with this dichotomy. Enter Step-up SIP.
What is step-up SIP?
A step-up SIP, also known as top-up SIP is like a traditional SIP except that it increases your investment amount periodically. Usually, investors receive income flows every month and witness a change in the package on an annual basis. Hence, the most prevalent periodicity of a step-up SIP is a yearly approach. There are 2 ways of increasing your SIP investment:
You can step-up your SIP on a fixed rupee basis every year. For instance, you can start an SIP of Rs5000 each month and then step up by Rs1000 each year. So moving forward, the monthly SIP contribution would Rs6000, Rs7000, Rs8000…etc.
You can also step-up your SIP investment on a percentage basis each year. For instance, you can start an SIP of R5000 each month and then step-up by 10% each year. So moving forward, the monthly SIP contribution would be Rs5500, Rs6050, Rs6655..etc.
Why should you top up your SIP?
Following are a few reasons why you should consider a step-up SIP for your mutual fund investments:
- It allows investors to better sync the SIP investments with budding income profile of the investor
- It teaches a sense of automatic discipline of investment even while you’re earning a more significant amount. That money could have been otherwise spent on unnecessary purchases.
- The step-up amount is decided in a way that your marginal tendency to save is either constant or keeps increasing. This is the fundamental key to wealth creation.
How to do a step-up SIP?
Setting up an SIP is quite easy and effortless. Just follow these 3 simple steps:
- Setting up a Step-up SIP
Choose mutual funds that best suits your risk appetite and financial goals. For example, more aggressive investors can go for a mid-cap or small-cap equity fund, while conservative investors can opt for a balanced mutual fund.
- Choose the Step-up SIP option
The online form permits you to choose the Step-up SIP option. All you have to do is enter the initial amount, step-up amount/percentage, step-up frequency and the final amount in respective columns.
- State a maximum investment amount
Investors have an option to put a cap on the maximum SIP investment amount they wish to invest each month. This way your SIP investment will continue to increase until it hits the maximum, post which it will act as standard SIP with the maximum amount as the same investment amount every month.