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We are aware of the advantages of investing in mutual funds (MF) through the systematic investment plan (SIP) route such as rupee-cost averaging and financial discipline. However, there is one problem in this conventional SIP route — a constant amount gets invested each month despite the fact that your income might be growing at a certain rate. This is where step-up SIPs come into play. Here is all you need to know about step-up SIPs.
What is step-up SIP
Step-up SIP is a facility, wherein the periodic SIP instalments automatically increase either by a certain amount or certain percentage. For instance, an investor starts with an SIP of ₹15,000 per month and steps it up by ₹1,000 every year. At the end of the first year, his/her SIP will increase to ₹16,000, which will further increase to ₹17,000 per month at the end of the second year. It is also known as Top-up SIP and SIP Booster.
A gradual increase in SIP instalments can help you achieve your financial goals quicker. For instance, if you have a monthly SIP of ₹10,000 in an MF and assuming an annual return of 12 per cent, your investment would be worth around ₹23.23 lakh in the next 10 years. However, if you step up your SIP instalments by 5 per cent annually, the total corpus would be worth ₹27.86 lakh over the next 10 years.
How it works
One can avail this facility either through fund houses by filing the form uploaded on their websites, setting it up on third-party investment platforms or contacting any MF distributor.
The step-up fixed amount varies across fund houses. Some fund houses offer to increase the SIP amount by a certain percentage, which too varies. If fixed step-up amount is considered, in case of ABSL and SBI MF, the minimum step-up amount is ₹500 and multiples of ₹500 thereon, while in the case of ICICI, Quant and HDFC, the same is ₹100 and multiples of ₹100. While ABSL does not allow investors to increase their SIP instalment amount by a certain percentage, it is 5 per cent for ICICI and SBI, 1 per cent for HDFC MF. For Quant MF, the minimum is 10 per cent and in multiples of 1 per cent thereafter.
Investors also have an option to freeze the SIP top-up amount once it reaches a fixed predefined amount known as cap amount. The fixed pre-defined amount should be the same as the maximum amount mentioned by the investor in the bank mandate. In case the cap amount and the maximum amount mentioned in the bank mandate are different, then the lesser of the two amounts shall be considered as the default amount of the SIP cap amount. If one wishes to stipulate an amount higher than the bank mandate, one needs to make changes to the bank mandate. Alternatively, investors can provide an end date to the SIP top-up amount, post which the SIP instalment will remain constant till the end of the SIP tenure.
The frequency of increasing the SIP amount can either be once in six months or a year, depending on the scheme of investment and the fund house. The facility is, typically, applicable on yearly and quarterly SIPs.
Investors subscribing this facility are required to submit the request at least 30 days prior to the SIP date. Top-up will be applicable from the next effective SIP instalment.To stop the step-up facility and convert it into a conventional SIP, one needs to fill the form available on the fund house’s website and tick the option of ‘Conversion of step-up SIP to SIP/CSIP’.
What you should do
With a step-up SIP facility, investors need not start a new SIP every year when income gets increased. However, this facility might not always be advantageous as it assumes that the income will increase either by a fixed amount or a fixed percentage every year, which might not be the case with everyone. There may be instances where going for step-up SIP/top-up SIP is not feasible, such as, say, you are a self-employed person and your income might not grow at a constant rate or amount every year, or in the case of a high-inflation environment where your expenses might grow faster than income. In such cases, you can cancel the step-up facility. Also, in instances such as pay cuts or job loss or a fund, in which you have availed this facility, is massively underperforming, you can either avail the Pause SIP facility or can even cancel the SIP depending on your situation.
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