What is SIP?
A traditional way of interval saving has been recurring deposits. These deposits helped people to save a small portion of their monthly income and fetch a predetermined return on the same. These investments were only possible through banks and post offices and were considered to be the safest type of investment amongst all. This was because RD carried a little less percentage than FD but an individual could convert the same in cash whenever they wished for. Earlier, most of the working class opened an RD and kept it going till their retirement so that the corpus would help them in the times they truly needed funds.
Basic Details of SIP
On similar grounds, the concept of SIP works. The only difference is that people usually get their SIPs done into all equity schemes or debt schemes which might not be that safe than RD but fetches higher return and attracts the averaging of unit cost during market volatility.
What happens in a SIP?
As an investor, you can start SIP now and, your advisor will fill up required documents and instruct your bank to deduct a specific amount every interval. This money will be invested in the particular scheme. As SIP occurs every interval says daily, weekly, monthly, quarterly, etc., it buys units of the scheme in the open market as on that particular day.
Thus, for example:
- If the market cost of 1 unit is Rs 10 during the first interval and,
- Rs 20 during the second interval,
- Your average purchase of a particular unit will be Rs 15
- Thus, your gain on the day of the 2nd interval as now your cost is Rs 15 when the market value of the unit is Rs 20.
This is why SIPs are considered the best in a volatile market. In a normal SIP, you gain a considerable amount of wealth if you keep your investments for 30 years. Even if you start now with a simple Rs 1000, your accumulated wealth after 30 years at an interest of 12% will be Rs 35,29,914 where your investment amount will be only Rs 3,60,000/-
What is Step Up SIP?
Step-up SIP is also commonly known as top-up SIP meaning every specific interval; you increase a specific amount or a specific percentage of your SIP and continue the same for the remaining period of your investment cycle.
Generally, top-up SIP is a form of a fresh SIP every year in the same scheme boosting the power of wealth creation by systematic increment on investing pattern each interval. Usually, people choose to pick every year as their incremental year. The compounding effect seen in step-up SIP is humongous when compared to normal SIP and people have created wealth in billions using this simple technique. It also creates planning and making oneself disciplined in terms of retirement planning and thereby reaching goals sooner rather than later.
Explaining Step Up SIP with an example:
- You may start with a fresh SIP today by instructing your advisor for Rs 1000/- each much in a particular mutual fund scheme.
- For step-up, you may instruct your advisor to increase the SIP amount by Rs 1000/- each year for the entire tenure of your investment.
This way, if you calculate for starting a SIP of Rs 1000/- for each month, with a step-up of Rs 1000/- each year, keeping the rate of interest as 12%, your compounded portfolio after 30 years will be Rs 8,10,94,471/- whereas your investment amount will be Rs55,80,000/-
Benefits of Step-up SIP
- Helps in adding a percentage to savings every year and thus creating wealth
- Helps in saving time by instructing prior to the start of SIP and, thus, one need not go through the process again every year.
- Habituating financial discipline principle and thus saving prior to expenses
- Builds bigger corpus than normal SIP
- One sees a humongous growth due to the magic of compounding
- Saves time and tax
- One can reach financial goals earlier and retire sooner
Who should opt for Step-up SIP?
An individual/company who knows that their income will increase gradually over the years and have the capacity to wait for a minimum of 5 years to see a considerable profit in their portfolio. It is mainly beneficial to people who lack financial discipline but are still willing to have a huge corpus before they hit their retirement age.
Challenges one can face in Step-up SIP?
- Change in lifestyle
If your lifestyle increases yearly or you are aware that you will need to spend a considerable amount of your monthly income on luxury, then keeping up with Step-up SIP will be difficult for you. If you just want to strive harder to spend money every year with an increment in income then step-up SIP is not for you. Sometimes, you may also see the one-time event in life like marriage or birth of your child than in that particular year, you will not be able to keep up with step-up SIP.
- Incremental income
It can be difficult to adopt a systematic increment in investment if your income does not rise every year with a particular percentage. If your company or business is new and needs considerable time to increase your income, you must only opt for traditional SIP which you can increase with the increment as and when it occurs.
Thus, if you are an investor, understanding the importance of creating wealth with the help of professional advisors is vital in life. As we are aware, that everything is available online today, picking a mutual fund house and a scheme online is a cakewalk. But technically, it is not. A financial planner will guide you by understanding your needs and help you reach your goals by picking the correct schemes. Moreover, on daily basis, they practice understanding the portfolio of a particular scheme and, if your investments need re-shuffling, then it is done at the right time.
Contact us for a free understanding of the working and, we will be happy to serve you.