Magic of Step-up SIP for Retirement Planning: People often start planning for financial well-being after retirement quite late. They feel that there are many years left for retirement, why think about it now! Many times people do not earn much at the beginning of their career. Hence, they are not in a position to save and invest a large amount every month. But it is not necessary to start investing with a large amount. Financial wisdom demands that the sooner you start saving and investing for retirement, the more you will benefit. Even if you are able to invest only Rs 1,000 every month right now, you will be able to create a large retirement fund in the long term with the help of Step-up SIP.
Why is it important to start early?
The real power of investment lies in ‘compounding’. Compounding means that you get a return on the return you get on your initial investment. Its effect is most visible in the long run. The power of this compounding increases even more when you invest through step up SIP. We will understand how with the help of an example, but first let us know what step up SIP means.
What is Step Up SIP?
Step up SIP is a strategy in which you increase your investment amount every year. That is, if you start with a SIP of Rs 1000 every month and then increase it by 10 percent every year, then it will be called Step up SIP. By following this strategy, your investment grows over time and the benefit of compounding is obtained rapidly.
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Understand the power of Step Up SIP with an example
If you start investing in an equity mutual fund at the age of 25 with a SIP of Rs 1000 per month and the estimated rate of annual return is 12%, then you can get a corpus of Rs 1.78 crore at the time of retirement at the age of 60. The condition is that you have to increase your SIP at the rate of 10% every year. You can understand this example well with the help of the calculation given below.
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1.78 crore fund from a Step-up SIP of Rs 1000
- Monthly SIP amount: Rs 1000
- Annual increase in SIP:10%
- Investment period : 35 years
- Estimated Annualized Return on SIP: 12%
- Total investment through Step Up SIP: Rs 32.52 lakh
- Estimated Fund Value after 35 years: Rs 1.78 crore
If you had invested through a normal SIP instead of increasing your SIP year after year, i.e. step-up SIP, then based on the same estimated annualized return (12%), your fund value after 35 years would have been only Rs 64.31 lakh. That is, by increasing the SIP by just 10% every year, the estimated retirement corpus increased by Rs 1.13 crore. This difference shows the power of step-up SIP.
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Combatting inflation
By following the step up SIP strategy, you can start with a small amount and increase your investment as your income grows. With this, you can easily counter the fall in the value of rupee due to rising inflation. This strategy not only provides the benefit of compounding, but also reduces the risk associated with market timing due to investing through SIP. While deciding to invest, it must be kept in mind that equity funds are affected by market volatility and there is no guarantee of returns. The full benefit of investing in equity funds through SIP is available only in the long term.
