A systematic Investment Plan, or SIP, is the surest way to accelerate to one’s financial goals. Step-up SIPs are also known as top-up SIPs. It signals an investment strategy that allows an investor to continuously raise investments in the SIPs – usually at the beginning of a 12-month cycle. This is in sharp contrast to a normal SIP where the amount invested does not change over the years and remains fixed.
There is more than one way of raising the investment amount in step-up SIPs. These can be by a fixed amount (say by Rs 5,000) or by a fixed percentage, say 5% or 10% of the earlier SIP. This strategy allows one to race to a financial goal far more quickly than normal SIPs.
SIP Calculator: Start early for early results
Let’s see how step-up SIP can help one to amass Rs 10 crore. Assume a youth begin working at 25 years of age. Let him/her start investing in mutual funds through the step-up SIP route. Also, assume the SIP in the first year is Rs 25,000.
Now, let this investor raise SIPs by 10% each year. Also assume 12% return on investments, which is not an impossible task at all with equity mutual funds.
Begin at 25 with Rs 25k/month
If this person continues this investment for 25 years, he/she can generate a total value of Rs 10,68,88,653 (Rs 10.68 crore). While the nominal out-of-pocket investments amount to Rs 2,95,04,118 (Rs 2.95 crore), the returns generated in the quarter of a century would amount to 7,74,83,535 (Rs 7.74 crore).
Now, let’s see what happens if the returns exceed 12%. If one manages to hit 13% return, the amount at the end of 25 years would turn out to be Rs 12,28,33,026 (Rs 12.28 crore). The point to note is that the amount invested remains the same while the total returns generated would jump to Rs 9,33,28,908 (Rs 9.33 crore).
Higher returns lead to quicker gains
There is another way to look at this situation. If one can land up with a 13% return, one can amass Rs 10 crore in 24 years. In fact, at the end of the 24th year, the portfolio would reach a value of Rs 10,51,47,734 (Rs 10.51 crore) including a return of Rs 7,85,98,536 (Rs 7.85 crore) on a total investment of Rs 2,65,49,198 (Rs 2.65 crore).
Step-up SIPs are one of the most effective tools for multiplying investments in the long term. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
