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Mutual funds and Systematic Investment Plan (SIP) form one of the most convenient forms of investment where an investor can invest a certain sum of money at regular intervals. As an investor, you have the liberty to decide the interval of the payments. This can be done annually, half-yearly, quarterly, monthly or even on a weekly basis. SIP is a good way to create a systematic investing habit which earns you regular returns on your investment. This article covers the following:
  1. What is the significance of SIP?
  2. Suitability of SIP
  3. What is Step-Up SIP?
  4. How is Step-up SIP different from the conventional SIP?
  5. How to do a Step-Up SIP?
 

1. What is the significance of SIP?

The great thing about SIP is that allows investors convenience in their investment. The investors do not need to make the periodic payments as it is deducted from their account automatically. You will be assigned a NAV or a Net Asset Value depending on your investment amount and the market conditions. With each additional investment more units of assets are incorporated into your portfolio, which makes use of different stages of the market as the units are purchased at different prices. This is crucial as it ensures that due to the compounding nature of value addition and the averaging of the Rupee-Cost the investor is benefitted. There is a common belief that mutual funds and SIP are ideal methods to start investing. To an extent, it is absolutely correct as it reduces the risks associated with the volatile equity market.  Investing in mutual funds via SIP over an extended period makes market timing irrelevant.

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2. Suitability of SIP

SIPs are not meant to be restricted for novice investors only. It is, in fact, noted that seasoned investors make it a point to invest in mutual funds using SIP. While SIP in itself is ideal for investors, funds houses offer further tailor-made schemes such as Step-up SIP, Trigger SIP, Perpetual SIP, Flex SIP, and Pause SIP. Each of these systematic investment plans is meant to help you achieve your financial goals and to allow you to restructure your investments. Let us look at Step-up SIP in more detail.

3. What is Step-Up SIP?

Step-up SIP is also known as top-up SIP. This is basically an automated feature through which you can increase your SIP contributions by determining an amount or a percentage to be deducted from your account at periodic intervals. This is done keeping line your income level and your financial goals. So, this plan allows investors who are unable to contribute higher amounts at the beginning of their investment to do so when they can afford to. There is a set plan for the investor to reach the predetermined investing amount over a period of time. As an investor, you can begin with a ‘Start amount’ and ‘Final amount’ while setting up the Step-Up SIP. You will also have to specify the amount and frequency with which you need the contribution sum to be stepped up. This allows you to reach your financial goals in a preset manner.

4. How is Step-up SIP different from the conventional SIP?

In the traditional form of SIP investing, investors do not have the option to increase their periodic contributions during the investment tenure of the plan. If one wants to invest more money than they were originally able to they’d have to open a new SIP investment account. This is where Step-up SIP proves to be highly resourceful as it allows people to translate their increased earnings into their already ongoing SIPs instead of starting a new account or simply spending it away. More often than not people are found to be hesitant in starting a new SIP, especially those who lack the financial discipline to save rather than spend. But having the option to increase your investment contribution with more disposable income at hand actually inculcates the habit of saving. With an automated incremental investing in SIP

5. How to do a Step-Up SIP?

a) Setting up a Step-up SIP is not very different from the usual systematic investment plans. Firstly, you are required to select a scheme that is best suited to your financial goals. More aggressive investors can opt for a small and mid-cap equity fund, while the conservative investors can go for a balanced fund b) Next, Choose the Step-up SIP option and provide the initial amount, Step-up amount, Step-up frequency and the final amount. Most fund houses allow you to increase the investment amount every six months or annually Investors can also put a cap on the maximum amount they wish to invest per month. This way your SIP investment would keep on increasing until it hits the ceiling amount, post which it will act as regular SIP with the same investment amount every month. You will have to select the step-up option while you are starting the systematic investment plan. Beginning a step-up option mid-way might not be possible. To stop the step-SIP, you will have to cancel the SIP and start a new regular one. As we have already seen, investing in Step-up SIPs has immense benefits over the regular SIPs. You can safely assume that your income would increase by 10% and go for a step-up amount of at least 5 to 10 percent. This will ensure that you maintain the savings that you require to reach your financial goals. If at any point in time, you are in a financial crunch, you can always pause the SIP for up to 3 months. Considering all these parameters, there is certainly no reason for you to delay your Step-up systematic investment plan.  

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If you had invested Rs 10,000
every month for last 25 years
in equity funds, you could make

₹ 3.3 Crores
at 15%* annual returns

Invested
Rs 30 Lakhs

Received
Rs 3.3 Crores

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