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Small and thematic cap mutual fund categories have attracted maximum SIP inflows hitherto in FY24. (Photo Credit: iStock)

Systematic investment plan in mutual funds is a consistent way of investing and usually returns over 15% over a long period. SIP. Through this, you invest a fixed amount in mutual funds every month. You can even start investing with a small amount, even as low as Rs 500 rupees. This is known as a simple SIP. However, if you add Step-up SIP to your investing process, it can be a great way to maximize your returns. Step-up SIP is a method through which you keep increasing your SIP amount. If your income increases, your SIP amount should also increase. This is something you can achieve through Step-up SIP. Let’s understand how this is better than regular SIP and how you can earn more returns using this technique.

Usually, people tend to forget all about their investments once they begin investing. When we start an SIP, we let it continue at the same interval and amount for many years. This is a financial mistake. Your SIP amount should increase in proportion to your income. This is also important so that you are well-placed to combat inflation.

To increase your SIP amount, you have two options. One is to close your old SIP and start a new SIP. This SIP should be the sum total of  the amount of the old SIP, and the extra amount you wish to add to your SIP. The second way is to keep your old SIP running, and to begin a new SIP with the extra amount you want to increase.

If you choose the option of Step-up SIP while starting your investments, then you can increase the amount of your old SIPs at regular intervals without having to start a new SIP. This means that you can increase your SIP by a fixed amount, for example Rs 500 or 1,000 every 6 months or year. This is also known as Top-up SIP.

For instance, if you start a SIP with Rs 5,000 in a scheme in 2024. You choose the option to increase the SIP amount by 10% every year through Step-up SIP. After one year your SIP amount will be Rs 5,500. Next year, it will be Rs 6,050, and so on. This way, your investments via SIPs will keep increasing every year.

The biggest advantage of investing in mutual funds is the increase in your money over time, or compounding. Compounding simply means returns on returns. Suppose you invest Rs 60,000, and earn Rs 4,800 at an estimated return of 8%. Now, this Rs 4,800 will be added to your initial corpus of investment, making your total invested amount 64,800 rupees. Next year, you will again earn an 8% return, but this time on Rs 64,800 rupees. That will be Rs 5,184,  which will again be added to your investment amount. This way, your money keeps increasing over time.

By increasing your SIP amount from time to time, with the facility of Step-up SIP, you can take greater  advantage of compounding. This is  because as your investment increases, so will the returns on it, which further accelerates the growth of your investment.

Let’s understand the difference in returns earned from normal SIP and Step-up SIP through calculations. Suppose X and Y, both have an SIP of Rs 10,000 each running  in an equity mutual fund. Equity mutual funds generally offer returns of up to 10-12% over a long period of time like 7 to 10 years or even more. X is running a normal SIP while Y increases his SIP amount by 10% every year. Both have an investment period of 10 years.

Using the Money9 SIP calculator, the future value of X’s investment after years will be Rs 23,23,391. Out of this, Rs 12 lakh is the investment amount while Rs 11,23,000 is the estimated earnings. On the other hand, Y also started with Rs 10,000. But he increases his SIP by 10% every year. So, in 10 years, he amassed a total of Rs 19,12,491 as corpus, and earned Rs 14,61,835, assuming an estimated return of 12%. After 10 years, his corpus would be Rs 33,74,326 rupees. In other words, Y will add Rs 10 lakh more to his SIP than X by increasing his SIP amount by just 10% every year. This means he could achieve a 30% improvement in returns in SIP with a 10% increase.

If you want to take advantage of Step-up in your existing SIP, then it’s necessary to know some things. First, most asset management companies do not offer the option of Top-up in running SIPs. However, you should talk to your company once. Second, there are some fintech investment apps that offer investors the option to increase their existing SIP amount. Third, you can also impose a cap on your can Step-up SIPs, so that you can control the increase in SIP.

Step-up SIP is a tool that can help you achieve your financial goals quickly. It works in a manner similar to how you increase the speed of your car when you need to reach somewhere quickly. If the interval of SIP is not increased, then it will take more time for your investment vehicle to reach its destination.