It is not for nothing that SIP, or systematic investments plans in mutual funds have become a hit across the country. According to AMFI figures, a whopping Rs 24,509 crore was channellised in Indian mutual funds in September 2024. They came through a total of 9.87 crore SIP accounts.
In the following calculation, it has been assumed that the mutual fund scheme generates 12% returns annually. But even bigger returns say 15% is possible in equity mutual funds. If the mutual fund returns are higher, the corpus will be bigger.
Is step up SIP good?
Step up SIP is a brilliant tool that allows an investor to increase his/her investment every year according to his/her growing income. As a result, two multiplying factors come into play – one, the long-term compounding and two, the fact that more and more amount of money is shovelled into the mutual fund scheme every year.
What if I invest Rs 1,000 in SIP for 20 years?
A simple use of the SIP calculator would show that a SIP of Rs 1,000 would generate Rs 9,99,148 in 20 years. However, if one can begin with Rs 1,000 a month in the first year and continue to raise it by 10% every year, the amount he/she will generate in 20 years is nothing less than Rs 19,88,872, which is nearly 20% more than what is amassed in the first instance.
This example amply demonstrates the power of a step-up SIP as against a simple SIP. Though both methods multiply investments to create wealth ahead of the inflation curve, the step-SIP does it more effectively. The assumption is that over the years the income of a person usually grows. Therefore, the principles of prudent financial management tells one that one should also keep aside more and more money for investment as the cash flow increases.
See what 5% step up will generate
If you think raising SIP amounts by 10% every year is not feasible, then let’s see with a calculation with only half the rate ie. Raising it annually by 5%. If an investor starts out with a small monthly SIP of Rs 1,000 in the first year and then goes on raising it by 5% every year, the step-up SIP calculator tells us that the 13,72,762, which is far more than what the simple SIP (that remains the same throughout the 20 years) will generate.
