Rs 4,444 Regular SIP Vs Rs 3,333 Step-Up SIP: Which Will Deliver Higher Returns Over 25 Years?

Thu, 30 Jan 2025 17:29:13 IST

Sip Calculator : Investing for the future is crucial, and selecting the right investment strategy can significantly impact the corpus you accumulate. Mutual fund SIP s (Systematic Investment Plans) are a popular option for long-term investors, allowing them to invest small amounts regularly. There are two key types of SIPs: Regular SIP and Step-Up SIP. Each of these offers distinct benefits depending on your financial goals, but which one is better for growing your wealth over a long-term horizon? In this article, we will compare Regular SIP with Step-Up SIP, and discuss which type can yield better returns over 25 years.

What is SIP?
Systematic Investment Plans (SIPs) are a market-linked investment option that allows investors to invest fixed amounts regularly in mutual funds. The investment can be made monthly, quarterly, or annually, depending on the investor's capacity and preference. SIPs offer investors the benefits of compounding and rupee cost averaging, making them a great choice for long-term wealth building.

Through SIPs, investors commit to regular investments, which helps in building a significant corpus over time, even with modest contributions. The key to success with SIPs lies in consistency, discipline, and a long-term investment horizon. The earlier you start, the better the chances of accumulating wealth through the power of compounding.

What is Step-Up SIP?
Step-Up SIP is an innovative variation of the regular SIP that allows you to increase your monthly investment amount periodically (usually by a fixed percentage, like 5% or 10% annually). This means that the investment amount will grow over time, helping you build a more substantial corpus as your income increases.

The primary advantage of a Step-Up SIP is that it accommodates increasing income levels over time. Instead of sticking to a fixed investment amount, you gradually increase your investment each year, which enhances the potential for higher returns, particularly in the long run.

Regular SIP vs Step-Up SIP: Comparing the Returns
Let’s take a look at how Regular SIP and Step-Up SIP compare in terms of returns over 25 years. We will use an example of a monthly SIP of Rs 4,444 and calculate the accumulated amount at different return rates.

Regular SIP

With an assumed return of 12% per annum, investing Rs 4,444 per month for 25 years, you would have:
- Total Investment: Rs 13,33,200
- Expected Capital Gain: Rs 70,99,890
- Total Corpus: Rs 84,33,090
With a return rate of 13% per annum
- Total Investment: Rs 13,33,200
- Expected Capital Gain: Rs 87,61,057
- Total Corpus: Rs 1,00,94,257
With a return rate of 14% per annum
- Total Investment: Rs 13,33,200
- Expected Capital Gain: Rs 1,07,86,822
- Total Corpus: Rs 1,21,20,022
With a return rate of 15% per annum
- Total Investment: Rs 13,33,200
- Expected Capital Gain: Rs 1,32,61,224
- Total Corpus: Rs 1,45,94,424

Step-Up SIP: Now, let’s look at the Step-Up SIP, where the monthly investment starts at Rs 3,333 and increases by 5% every year over 25 years.

At a 12% annual return
- Total Investment: Rs 19,08,893
- Expected Capital Gain: Rs 72,06,149
- Total Corpus: Rs 91,15,042
With a 13% return
- Total Investment: Rs 19,08,893
- Expected Capital Gain: Rs 87,98,083
- Total Corpus: Rs 1,07,06,976
At a 14% return
- Total Investment: Rs 19,08,893
- Expected Capital Gain: Rs 1,07,19,399
- Total Corpus: Rs 1,26,28,292
With a 15% return
- Total Investment: Rs 19,08,893
- Expected Capital Gain: Rs 1,30,43,304
- Total Corpus: Rs 1,49,52,197

Key Differences Between Regular SIP and Step-Up SIP

While both Regular SIP and Step-Up SIP are designed to help build wealth over the long term, there are a few key differences that investors should consider before making their choice.

Investment Growth Over Time: Step-Up SIP allows for higher growth due to the increasing monthly contribution, which means it has the potential to generate higher returns over time. As your income grows, your SIP contributions increase, compounding the effect of your investments.
Flexibility: Regular SIPs offer consistency with fixed monthly investments, which are suitable for those who prefer stability and have a fixed income. Step-Up SIPs, however, are better suited for individuals whose income is likely to rise over time, allowing them to gradually increase their contributions.
Total Investment: Step-Up SIP generally results in a higher total investment over the long term due to the incremental increase in the SIP amount. Regular SIPs, on the other hand, are more predictable in terms of investment amounts.
Returns Potential: Due to the higher total investment, Step-Up SIPs tend to outperform Regular SIPs in terms of overall returns, especially when combined with a higher annual return rate.

When choosing between Regular SIP and Step-Up SIP, it’s essential to evaluate your financial goals, income growth potential, and comfort level with increasing investments over time. For individuals who are just starting out or have a fixed income, Regular SIP might be the more comfortable choice. However, if you anticipate future income growth and want to maximise your investment potential, Step-Up SIP could offer higher returns in the long run.

Both options have their merits, and the best choice depends on your personal financial situation. However, starting an SIP, regardless of the type, is a step in the right direction towards securing your financial future.

Disclaimer: The information provided is for general informational purposes only and should not be construed as financial advice. Please consult a financial advisor for advice specific to your individual situation.