Sita and Gita started a monthly SIP of ₹10,000 in the same flexi-cap fund. However, after 25 years, on retirement, Sita accumulated ₹83 lakh more than Gita. The reason: Sita had opted for a 5% annual increase in the SIP amount. In this article, we will understand what a step-up SIP is and how it can help you accumulate a higher amount than a regular SIP.
Sita and Gita’s retirement planning
Sita and Gita are 35 years old. They started a ₹10,000 monthly SIP in a flexi-cap fund to build their retirement corpus. Sita opted for a step-up SIP, in which the SIP amount increased by 5% annually. Gita opted for a regular SIP, where the SIP amount stayed constant.
Both of them continued with their SIP till their retirement (age 60). Over the period of 25 years, the fund delivered a return of 12% CAGR. Let us look at how much Sita and Gita accumulated in their retirement corpus.
| Investor | Monthly investment | Tenure | Return | Retirement corpus |
|---|---|---|---|---|
| Sita | Rs. 10,000 increasing by 5% annually | 25 years | 12% CAGR | Rs. 2.73 crores |
| Gita | Rs. 10,000 | 25 years | 12% CAGR | Rs. 1.90 crores |
Over 25 years, Gita invested ₹30 lakh, which grew to ₹1.90 crore, growing at a 12% CAGR. On the other hand, Sita invested Rs. 57.27 lakh, which grew to Rs. 2.73 crore, growing at a 12% CAGR. With a small tweak (a 5% annual increase in monthly SIP amount) in her investment strategy, Sita accumulated ₹83 lakh more than Gita in her retirement corpus. In short, Sita opted for a step-up SIP and Gita opted for a regular SIP.
What is a step-up SIP?
A step-up SIP allows you to increase the SIP amount at a set frequency. For example, suppose you start a ₹10,000 monthly SIP with the step-up option. In this case, when registering the SIP, you can give an instruction to increase the SIP amount by a specified amount (for example, ₹1,000) at a set frequency (for example, annually).
To ensure the SIP amount stays within your payable limits, you can define the SIP step-up cap. For example, you can set the cap at ₹15,000. In this case, once your step-up SIP amount reaches ₹15,000, it will stay constant. A step-up SIP is also known as a top-up SIP.
In the above example, the monthly SIP amount will start with ₹10,000. Every year, the SIP amount will increase by ₹1,000. So, the SIP amounts will be as follows: 1st year – monthly SIP of ₹10,000; 2nd year – monthly SIP of ₹11,000; 3rd year – monthly SIP of ₹12,000; and so on. In the 6th year, the monthly SIP amount will increase to ₹15,000 and stay the same thereafter.
Let us understand how the step-up SIP works with the example of HDFC Mutual Fund.
Source: HDFC Mutual Fund website
The screenshot above shows how the top-up SIP window looks on the HDFC Mutual Fund website. You need to specify the top-up amount. Some AMCs give you the option to increase the top-up SIP amount as a percentage or an absolute amount.
Next, select the frequency of the change in top-up SIP amount. For example, with HDFC MF, the frequency change can be half-yearly or yearly. If you select the half-yearly option, the top-up SIP amount increases after every 6 months; for the yearly option, the top-up SIP amount increases every 12 months.
Next, select the SIP top-up cap. With HDFC MF, you can specify the cap by amount or month year. Suppose you start the top-up SIP in 2026 with an annual increase and set the cap month-year to March 2030. In this case, the SIP amount will increase annually till March 2030. After March 2030, the SIP amount will stay constant.
Why is the step-up SIP better for retirement?
All of us expect our income to increase every year, although the percentage increase can vary. Expecting the annual income to increase by 5-10% every year is reasonable. With that kind of income increase, our annual expenses (inflation and lifestyle) also increase by about the same percentage. So, it is quite natural to increase our SIP investments by the same percentage every year.
A step-up SIP helps you reach your financial goals faster than a regular SIP. It benefits from increased contributions and compounding. Thus, for your retirement planning, a step-up SIP can help you build a habit of contributing more towards your retirement corpus as your annual income grows.
At any time, if you are unable to manage the increased SIP amount, you have the flexibility to pause the SIP. The pause facility ensures that any short-term financial challenges are taken care of.
Retirement planning is a long-term financial goal. With time on hand, you must start as early as possible, preferably the moment you start earning. If you start with a step-up SIP, you will start with a lower amount compared to a regular SIP. Thus, with a step-up SIP, you start with a small amount, increase it annually as your annual income grows, and achieve your retirement corpus with ease and the much-needed peace of mind.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
