The big question before most of the investors investing in mutual funds is whether they should start Fixed SIP with huge lump sum savings or choose Step-up / Top-up SIP by starting with a small amount and increasing the investment every year. In fixed SIP, the monthly investment amount remains the same throughout the tenure (e.g. ₹ 10,000 every month), whereas in step-up SIP, the investor increases the SIP installment by a fixed percentage (e.g. 10%) every year in line with the annual increment in his income. For example, if you start with ₹5,000 and add a 10% annual step-up, the premium will increase every month by ₹5,000 in the first year, ₹5,500 in the second year, ₹6,050 in the third year and so on. At first glance, it may seem that a fixed SIP of depositing double the amount from the beginning i.e. ₹10,000 per month would be the way to go, but the combination of compounding and time gives surprising results in the long run.
If an average annual CAGR of 12% is assumed, the results for both strategies over 15 years are quite interesting.
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Fixed SIP of ₹10,000 (15 years):
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Total Deposit: ₹18,00,000 (₹10,000 every month for 15 years)
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Estimated Interest/Profit: Approx ₹32,45,760
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Total Maturity Fund: Approximately ₹50,45,760
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10% Step-up SIP of ₹5,000 (15 years):
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Total Deposit Capital: Approximately ₹19,06,346
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Estimated Interest/Profit: Approx ₹33,83,310
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Total Maturity Fund: Approximately ₹52,89,656
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An initial SIP of ₹5,000 over a 15-year tenure beats a fixed SIP of ₹10,000 at 10% compound annual growth and creates a larger corpus of around ₹2.44 lakh.
The real striking difference is seen over a longer investment horizon of 20 years, where step-up SIPs outperform fixed SIPs by a huge margin.
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Fixed SIP of ₹10,000 (20 years):
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Total Deposit Capital: ₹24,00,000
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Estimated Interest/Profit: Approx ₹75,91,480
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Total Maturity Fund: Approximately ₹ 99,91,480 (approximately ₹ 1 crore)
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10% Step-up SIP of ₹5,000 (20 years):
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Total Deposit Capital: Approximately ₹34,36,500
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Estimated Interest/Profit: Approx ₹1,03,50,000
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Total Maturity Fund: Approximately ₹1,37,86,500 (approximately ₹1.38 crore)
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Step-up SIP generates additional funds of approximately ₹38 lakh over 20 years. Although the total corpus is also about ₹10.36 lakh more than a fixed SIP, the compounding return on that additional capital makes the final corpus about 38% larger.
In the early stages of one's career, when salary is limited and expenses are high, starting a big fixed SIP of ₹10,000 at the very beginning is not possible in everyone's budget. Step-up SIP of ₹5,000 is the most practical and stress-free option for such investors, because as the career progresses and income increases, the SIP installment also naturally increases in the same proportion. For investors whose income is stable or who want to limit their expenses for a long time and keep their investments on auto-pilot mode, Fixed SIP is a disciplined medium. Step-up SIPs for long-term financial goals like retirement planning or children's higher education prove to be the most effective weapon to beat inflation.