Systematic Investment Plan or SIP has captured the imagination of the people of India due to two main reasons. One, it offers an extremely convenient method of investment without straining the finances of an individual who can tailor investments according to his/her income and expenditure. Two, SIPs in equity funds are capable of generating high returns that can comfortably beat inflation in the long term.
SIPs can be categorised into 2 types – the normal vanilla SIP where the amount of investment during the entire period remains the same and step-up SIP where the investor raises the SIP amount every year by a fixed amount of money or a fixed percentage of the last year’s SIP.
SIP calculator
There can be a big difference between the two. Let’s take the help of the SIP calculator to understand. In the first instance let an investor put a small amount – say Rs 2,000 in SIP – and continue investing for 20 years. In the process, he/she will accumulate Rs 24,97,870, or Rs 24.97 lakh – investment of Rs 6 lakh will generate Rs 18,97,870 returns.
Mutual Fund Step-up SIP model
Let’s now turn to the step-up SIP model. If one starts with the same small monthly SIP of Rs 2,000 and follows it up with continuous increases over the years, a significantly higher corpus will accumulate. If he/she increases the SIP amount by 10% a year, the final value will amount to Rs 39,77,743 or Rs 39.77 lakh. (Nominal investment of Rs 13,74,600 (13.74 lakh) will trigger returns of Rs 26,03,143 (26.03 lakh).
Since one’s salary is expected to go up every year, it won’t be too difficult to raise SIP by a fixed percentage. It provides an accelerated way to reaching a financial goal for buying a house, or a car or go for a vacation abroad. Starting uot with Rs 2,000 and raising it annually by 10% would mean SIP of Rs 2,200 every month in year 2, Rs 2,420 every month in year 3 and so on.
The assumption in all the above instances is that returns will be 12% on the investments. Any higher return – which is perfectly possible – will fetch higher accumulations.
(Disclaimer: This article is only meant to provide information. News9 does not recommend buying or selling shares or subscriptions of any IPO and Mutual Funds.)
The step-up Systematic Investment Plan mechanism in mutual funds paves the path to achieving one’s financial goal quickly. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
