The individuals hoping to increase their wealth over time, have one the best options is Systematic Investment Plans (SIPs) which is safe and gives better returns than conventional term deposits. But, selecting between a step-up SIP (also called a SIP with an annual increase) and a fixed SIP that is monthly fixed savings without increment, may be a confusing task as to when and which method of investment to follow .
We’ll go over the main distinctions between these two SIP investment strategies, their advantages, and whether one could be more appropriate for your financial objectives in this comprehensive guide.
Fixed SIP
- A fixed SIP involves investing a predetermined amount of money at regular intervals, typically monthly without altering it. For example, you keep investing Rs.10,000 per month for 10-15 years.
- The investment amount remains constant throughout the investment period.
- It is a straightforward, easy-to-manage approach to investing.
Benefits of Fixed SIP
- Fixed SIPs are easy to set up and maintain, providing consistency in your investment plan.
- It provides discipline as regular, fixed investments inculcate financial discipline and ensure that you consistently contribute towards your investment goals.
- Since the investment amount is fixed, it allows for better budgeting and financial planning.
Step-Up SIP
- A step-up SIP, also known as a progressive SIP, allows investors to increase their investment amount periodically, usually annually. For example, you increase your SIP amount at the rate of 5% as your income is also increasing.
- The increase can be a fixed percentage or a specified amount.
- This strategy aligns with the increasing income levels and aims to accelerate wealth accumulation over time.
Benefits of Step-Up SIP
- As salaries and incomes typically rise over time, step-up SIPs allow your investments to grow in tandem with your earning capacity.
- By increasing the investment amount periodically, you can potentially accumulate more wealth compared to a fixed SIP.
- Step-up SIPs help in combating inflation by increasing the investment amount, ensuring your investments maintain their real value over time.
Compare Fixed SIP and Step-up SIP returns
Let’s consider an example to illustrate the difference:
Fixed SIP: You invest ₹10,000 per month for 10 years.
- Total Investment: ₹12,00,000
- Assuming an annual return of 12%, the corpus at the end of 10 years would be approximately ₹23,23,391.
Step-Up SIP: You start with ₹10,000 per month, increasing by 10% each year.
- Total Investment: ₹18,62,033 (due to annual increments)
- Assuming an annual return of 12%, the corpus at the end of 10 years would be approximately ₹31,22,230.
As seen in the example, the step-up SIP results in a significantly larger corpus due to the incremental investment amounts, highlighting the potential advantage of this strategy.
If you are thinking 10% increment is too high, remember you have to calculate 10% on 10,000 which makes your SIP 11,000 rupees per month from next year. You can increase your SIP at a rate of 5% also.
Calculate Returns using calculators
Read this: SIP vs Lump Sum: Build Your Own Investment Strategy
Which Strategy is Better?
It totally depends on your salary, expenses and your financial goal, which one you want to opt for. If you are focusing on increasing your income, you can increase your SIP every year based on your salary or earning increment.
Step-up SIPs and fixed SIPs both have their own benefits; which is better for you will depend on your financial goals. For novices and individuals with steady incomes, fixed SIPs provide simplicity and stability. Step-up SIPs, on the other hand, serve investors who want to expedite their wealth creation while anticipating steady income increases.
You should successfully utilize the potential of SIPs to meet your long-term financial goals as they provide better returns compared to term deposits offered by bank accounts. Start now, select the approach that most suits your needs, and observe the gradual growth of your money.
