Step-Up SIP: A Smart Investment Strategy for Growing Wealth
In the world of investing, one of the most efficient ways to achieve long-term wealth creation is
through Systematic Investment Plans (SIPs).
While SIPs are already a popular and straightforward method for investing in mutual funds, there's a
variation known as Step-Up SIP that offers an enhanced approach, particularly for individuals
looking to increase their investment over time.
In this article, we’ll dive into what Step-Up SIP is, how it works, and provide an example with a
formula for better understanding.
What is Step-Up SIP?
Step-Up SIP is a type of SIP where the investor increases their monthly contribution (the SIP amount)
at a predefined rate after a certain time period. This strategy is ideal for individuals who expect
their income to grow over time and want their investment to keep pace with it.
By increasing the SIP amount periodically, the investor can benefit from compounding and accumulate
a larger corpus over the years.
How Does Step-Up SIP Work?
In a regular SIP, you invest a fixed amount every month. However, in a Step-Up SIP, the amount increases periodically, usually every year or two. This means that you start with a modest investment, and as your financial situation improves, you increase your monthly contribution to your SIP.
For Example:
- In the first year, you might contribute ₹5,000 per month.
- In the second year, you can increase it to ₹6,000 per month.
- In the third year, you increase it further to ₹7,000 per month, and so on.
This approach helps you build a larger corpus over time without putting undue pressure on your current finances.
Formula for Step-Up SIP
Formula to calculate Step-Up SIP.
\[ FV = P_1 \times \left( 1 + \frac{r}{n} \right)^{nt} + P_2 \times \left( 1 + \frac{r}{n} \right)^{(nt - n)} + \]
\[ P_3 \times \left( 1 + \frac{r}{n} \right)^{(nt - 2n)} + \dots \]
Example of Step-Up SIP
Let’s walk through an example to make the concept clearer.
Let’s calculate using these values:
- Initial SIP Contribution: ₹\(5,000\) per month.
- Step-Up Amount: ₹\(500\) increase each year.
- Annual Rate of Return: \(r=0.08\) (8%).
- Investment Period: \(t=5\) years.
Now, Let's substitute above values in Step-Up SIP formul.
\[ FV = 5000 \times \left( 1 + \frac{0.08}{12} \right)^{60} + 5500 \times \left( 1 + \frac{0.08}{12} \right)^{48} + \]
\[ 6000 \times \left( 1 + \frac{0.08}{12} \right)^{36} + \]
\[ 6500 \times \left( 1 + \frac{0.08}{12} \right)^{24} + 7000 \times \left( 1 + \frac{0.08}{12} \right)^{12} \]
\[ FV = 5000 \times 1.48985 + 5500 \times 1.42257 + 6000 \times 1.35962 \,+ \]
\[ \text 500 \times 1.30061 + 7000 \times 1.24469 \]
\[ FV = \text ₹7,449.25 + \text ₹7,824.14 + \text ₹8,157.72 \,+ \]
\[ \text ₹8,453.96 + \text ₹8,702.83 \]
\[ FV \approx \text ₹41,587.90 \]
Now, After 5 years your total wealth would be approx \(\text ₹41,587.90\)
