Creating wealth using step-up SIP

Nowadays, everyone is educated enough to understand the importance of a systematic investment plan (SIP) so much that even stockbrokers offer SIP in stocks. 

You can read SIP in stocks or SIP in mutual funds? to make the right choice between the two. 

However, do not make the mistake of assuming SIP as a magic tool that will work for you just like the fairy’s magic wand and help you create a substantial amount of wealth. 

Indeed, SIP has the power to create such wealth, but you need to be reasonable with it. You cannot expect it to give you Rs 1 crore in 10 years with Rs 10,000 SIP per month for 10 years. Even if we assume compounded annual growth rate (CAGR) of 15 per cent then also, the maximum amount it can accumulate is Rs 28 lakh, assuming a monthly SIP of Rs 10,000. 

Now you may ask then what’s the realistic way of achieving Rs 1 crore in 10 years via SIP? 

There are basically two ways you can do that: 

1. Either increase your SIP amount or, 

2. Have a step-up SIP in place 

However, before moving onto that, let us first set realistic return expectations from the equity market. In order to do that, we would be taking the average 10-year rolling returns of Nifty 500 TRI from April 1999 to March 2021. 

The above graph clearly shows that the returns that we might be expecting in the year 2011, we cannot expect the same now. The average 10-year rolling returns work out to be 14.87 per cent. Therefore, we can safely expect that equities would give a CAGR of approximately 15 per cent. 

Now as we have set the right return expectations, let us look at how the above-mentioned options work. 

However, before that, you might be wondering what is this step-up SIP? 

Step-up SIP is nothing but a way wherein you can increase your SIP amount periodically either in terms of amount or percentage. Let’s say, you presently have a running SIP of Rs 10,000 per month and you wish to increase the same by 5 per cent every year then for the next year, your monthly SIP amount would be Rs 10,500, and so on. 

Another, logical question here would be what percentage is right for you? This is quite subjective and would depend on a lot of things such as your income, your expenses, your assets, your income growth rate, your risk protection, etc. However, as a thumb rule, you can link the growth rate of your income with it. Say, if every year on average, your income grows by say, 10 per cent, then you can step up your SIP by 10 per cent accordingly. 

Now let us do some number crunching to understand what SIP amount you would be required per month to accumulate Rs 1 crore in 10 years. You would need to invest Rs 35,900 every month in a diversified equity fund to achieve Rs 1 crore in 10 years. However, not many would have this much amount per month at their disposal. So, here, step-up SIP plays a vital role wherein you do not need to put Rs 35,900 upfront but start with Rs 27,800 per month and increase the same by 7 per cent every year. 

As we can see in the above graph, step-up SIP naturally performs better than normal SIP as step-up SIP investment is 41 per cent more than normal SIP investment.

Who should go for step-up SIP? 

There is no fixed rule that says only x person or y person should invest via this method. In fact, this strategy might prove to be helpful for the masses. As those who don’t have such a big amount to invest initially, the step-up method helps them to invest and gradually increase the investment. Moreover, even those who can afford the normal SIP can actually invest using step-up SIP. This way they can achieve financial goals early and can divert their SIPs to other financial goals or even if they choose to continue, they would be accumulating a handsome amount at the end of the investment horizon.