SIP vs Step Up SIP
Hi guys A finance noob here. Recently, I saw a lot of videos about Step up SIP and I agree with the point that after every raise you should increase your investments, but I tried a few calculators and didn't find that step up system increased my profits insanely in any way. E.g. 7000 monthly SIP for 10 Yr at 12% Return Invested amount = 8.4 L Estimated Return= 7.8 L Total = 16.26 L 7000 monthly + 10% step for 10 Yr at 12% Return Invested amount= 13.38 L Estimated Return = 10.2 L Total = 23.6 L Here I am paying approx 5 L more and the benefit is around 7 L more (out of which 5L is from my pocket), so 2L benefit. Can someone please explain why this step up is so hyped as of now? Or what did I miss?
I am not going to verify your maths, I hope it is correct and in that case you can also see that you get 2 lakhs more over that 10 years period from your investment.
See, the idea of step up sip is that you are going to earn more in the future and so you increase your investment amount so as to reach your financial goals earlier than normal sip. Today you may not afford to put 1000 in sip so you start smaller, and. increase your contribution slowly.
I know you're genuine with the question but if you're going to be reductive about step sip then remember putting 8.4L in a lump sum in the first year is going to beat your sip. So yeah, simply it's about how much you can invest (also averaging in sip but not really in step up sip).
SteveRogers
Stealth
8 months ago
Hi Thanks for responding. The maths is from an online calculator. So , the confusion started that in normal sip i put 8.4 L and it generated 7.8 which is closer to 90%.
And in the step up sip I invested 13.38 and it generates 10.2 which is around 78%.
So why is this difference there I could not understand?
Is it because a major chunk of my money would be invested later on as the step up increases the amount I invest and this new amount doesn't get time to grow? Or is it something else?
It is all about concluding
The last few step ups get less time to compound and the initial small step ups get time to compound .
Increase the time period and see , you will realise the value of Step ups
After using them significantly, my suggestion would be that all these calculators are useless, unless you are putting in fixed interest rate instruments.
After all, there is no real yearly CAGR in equity that can be 'calculated' upfront. You could have a great crash at the 10th year that pours water over your nicely setup plan. Or a great bull run even if you put only normal SIP or even stop it midway and still beat your calculations.
Just invest a portion in equity, readying yourself to ride the wave. Regularly move portions of gains to fixed income to protect it. Now try calculating % return for this portfolio, without knowing how much gains you will move each yr to fixed income..!!
