Step-up SIPs: Do mutual fund investors need them?

When an investor registers for a SIP the investment amount, typically every month, remains the same for the entire duration. If he wants to increase his contribution at any time, he has to start or add a new SIP. Using the step-up facility, any investor who has a SIP running a mutual fund scheme can increase it by a fixed amount or percentage at predefined intervals. Most investors opt for a half-yearly or annual top-up. Generally, the amount to be topped up is the likely growth in future income. Such an approach helps investors to start with a small investment amount and gradually increase it as their income grows over time.

How does step-up SIP work?
In a step-up SIP, the investment amount increases periodically. For example, an investor starts with a SIP of Rs 10,000 per month and steps it up by Rs 1,000 every year. After the end of the first year, his SIP will increase to Rs 11,000, which will further increase to Rs 12,000 per month at the end of the second year. This facility is offered by most fund houses and third-party investment platforms. Financial planners believe this helps inculcate discipline amongst investors and takes away the hassles of increasing SIP every year when salary rises. Investors can opt for this facility while registering their SIP or even at a later date as and when they wish to top up their investments.

Why do investors need step-up SIPs?
Many investors run SIPs to meet their long-term financial goals, be it children’s education, marriage, buying a property or retirement. This step-up facility is helpful as it automatically accounts for inflation and takes care of salary increases. It is cumbersome to start a new SIP every year when you get a salary hike and hence this top-up SIP automates this process.

Are there any disadvantages ?
A step-up SIP works on the premise that an investor’s income will increase by a fixed percentage year-on-year. However, in times of high inflation, there could be instances where expenses will rise faster than income, due to which increasing the SIP amount may not be feasible. There could be a job loss or loss in income for a family member due to which one will not be able to step up the SIP.