I was once in a feedback session organized by our HR. This session intended to get some insights of our expectations from the organization. A guy next to me suggested the interviewer, “Our rents increase every year by a fixed percentage, so why shouldn’t there be a minimum threshold for salary increments?”. It was one of those situations wherein, by asking for the impossible, we try to obtain the best possible. So, I won’t comment on the rationale behind the demand, but it kept me thinking for a while. If we can think of our expenditures this way, why not our savings? Let’s reverse engineer his statement. If I am getting some kind of increment each year, why is my SIP constant? And that is when I decided to explore what is step up SIP and it’s importance in our goal achievement.

What is Step up SIP?

Step up or Top up SIP, as the name suggests, is an SIP which increases by a certain amount/fixed percentage at a periodic interval. This interval can be quarterly, half yearly or annually (most preferred). A number of fund houses provide option to opt-in the step up facility before enrolling into the plan but in some cases you may have to do a manual transaction.

Who Should Opt-In for Step Up SIP?

It never harms to save more and reach your goals early. In my opinion, if you have a steady flow of income with fixed increments, everyone should opt in for step up SIP. However there are some specific cases where this can be the only way forward for you:

• If your goals are big enough to the extent that you cannot save enough for them, a step up SIP will allow you to start small and eventually reach there just in time. Disclaimer: Numbers ahead:
  • So if you plan to have 40L (inflation adjusted) in next 15 years
  • Calculating the XIRR, we know that we need a SIP of 12k per month to achieve this. But what if you cannot set aside this sum as of now?
  • In that case, doing a step up SIP of 5% increment annually, you can reduce your current amount by 25%
  • That would mean, you can start with Rs. 9,000 today and step up periodically to achieve the exact same amount after 15 years.

• If you lack financial discipline to increase your SIPs each year, you should opt in for a step up option before enrolling. This would be one of those rent situations where you may resist at first but eventually will come to terms with it.

• If you want to reach your goals faster, step up SIP can be really handy. Table below shows how a simple step of 10% each year can help you almost triple your returns in the same period.

How to Calculate Returns?

I think this is the most motivating part while you are investing opting in the top up option. Once you know that your returns are now going to take care of the ever increasing inflation, there is a good reason to go ahead. I use this simple calculator from Fintra to calculate the returns on my Step Up SIP. This ‘robinhood investor‘ friendly calculator seeks some basic details from you and eventually gives you the desired results in a trice. As an example,

I entered the below parameters in the calculator:

SIP Amount ₹5000
Annual Expected Return 11%
Annual Step-up 10%
Time period 10 years
SIP Frequency 12 times in an year

And got the below output. Sweet and Simple!:

Total Investment ₹9,56,246
SIP Returns ₹6,46,075
Final Amount at Maturity ₹16,02,322

Conclusion:

Although there can be some foreseeable challenges like no increments (thanks to COVID-19 for bringing this in our consideration set), lifestyle changes, welcoming a new born etc., I think it is in our complete interest to step up the portfolio to circumvent these challenges in future.

You don’t have to see the whole staircase, just take the first step.

-Martin Luther King Jr.

Until Next Time..