Step-Up SIP vs Flat SIP: Which Approach Fits a Growing Income?

One of the two investors chooses to go with a flat SIP. This means that Investor A will continue to invest 5,000 Rupees every month as long as the SIP is not altered.

The other investor goes with a step-up SIP where the monthly contribution is scheduled to increase by 500 Rupees every year. With this SIP, the contribution will be 5,000 Rupees in the 1st year, 5,500 Rupees in the 2nd year, 6,000 Repees in the 3rd year, and so on.

In this case, Investor B is scheduled to contribute more over the years as compared to Investor A, assuming that the step-up instructions were maintained. This increment in contribution over the years is due to the increase in contribution itself, and not due to any special or guaranteed return.

An important implication of this example is that, just having a higher SIP amount does not necessarily give you a better SIP amount. Raising your Incremental SIP causing you to borrow money for your usual expenses, increases your financial stress, or lowers your emergency savings is not a sustainable strategy.

In order to understand the impact of a SIP increase relative to a lump sum investment, you can check our SIP vs lumpsum comparison.

When a Step-Up SIP May Fit

In case your income grows over the years, and you expect to have an increased investment on an ever growing salary, then a step-up SIP is a good option to consider.

• Growing salary: Your compensation is expected to increase over time.

• Long investment horizon: You are investing toward goals that may be several years away.

• Increasing financial capacity: You expect your ability to invest to improve as your career progresses.

• Goal-based investing: When approaching the deadline for reaching your target, expect to have to increase your contribution amount.

• Disciplined contribution increases: In the absence of flexibility, you would like to implement a structure that would allow an increase with future contributions.

While we are in agreement for the need to increase contributions aligned with your financial goal, it must be reviewed in the context of your income and expenses. A predefined increase should not become a financial burden.

When a Flat SIP May Fit

A flat SIP can be an option when predictable investments outweigh a priority for increasing investments over time.

• The income you earn is irregular or uncertain.

• There are significant short term financial goals you must meet.

• You are still building your emergency fund.

• You like having simple and predictable monthly investments.

• You like having the flexibility to adjust your SIP each time your income changes.

For example, a freelancer or business owner might prefer having more control over their monthly investments in a weaker income month.

Choosing Based on Income Growth

The growth of your expected income can be one of many factors in determining whether to use a step-up SIP or a flat SIP and should not be the only factor.

If your expenses are stable and your income tends to increase then a step-up SIP can help you increase your contributions while keeping your expenses stable. If the growth in your income is uncertain, then a flat SIP will give you more predictable investments.

You can also think about this schematically:

• Stable income + expected salary growth: A step-up structure can fit into your future budget.

• Stable income + stable expenses: Either structure can work, consider which is more convenient and more useful in the long-term.

• Variable income: Consider a Flat SIP.

• High existing commitments: Choose a step-up SIP that allows for greater control.

There’s no fixed percentage or rupee value for a SIP step-up that applies to each investor. Your step up should reflect your income and your financial goals.

How Goals and Investment Horizons Impact Your Decision

Your goal plays a role too. Retirement is a longer-term goal meaning more time to set up a plan to progressively increase contributions as your income and earning capacity grows. Smaller or more immediate goals require a more specific plan based on the final target amount and the respective time frame.

The first step in any goal is setting the target, the estimated time frame in which you plan to reach that goal, and the amount you’re able to set aside to invest. Once that is done you want to consider if your SIP contribution is aligned with the other components of your financial plan.

Don’t go with a step-up SIP just because your contribution is increasing. There should be a logical connection to the cash flow and objective.

For advice and support, our how SIP works guide provides the framework necessary to understanding regular contributions and market-linked investing, and the processes associated with SIPs.

Some of the More Common Mistakes Made with Step-Up SIPs

1. Choosing an aggressive increase: A large annual increase may look attractive initially but become difficult to maintain later.

2. Ignoring expenses: Salary growth does not always mean disposable income grows at the same rate.

3. Assuming higher contributions guarantee higher returns: Increasing the investment amount does not guarantee investment performance.

4. Ignoring scheme-specific terms: Step-up facilities can have their own rules, frequencies, limits and conditions.

5. Skipping periodic reviews: Income, expenses, goals and financial responsibilities can change.

6. Investing before building financial stability: Emergency savings and other important financial priorities should not automatically be sacrificed for a higher SIP.

Important Things to Check Before Starting or Increasing a SIP

Before you begin a flat or step-up SIP, please read the mutual fund scheme’s objectives, read the risks and costs, and the related documents. Mutual funds involve market risk and past results may not indicate future performance.

SEBI has various sites that contain information helpful to investors, while AMFI has mutual fund investor education information. Please go to the SEBI Investor site and check the AMFI Investor Education information as well.

For SIP basics and investor education, please look at the information and related documents for the scheme that you are interested in.

Step-Up SIP vs. Flat SIP: Which Should You Choose?

It depends on your finance circumstances.

A flat SIP may be helpful if you prefer certain amount contributions over uncertain income, and/or prefer reviewing contributions yourself. A step-up SIP may be helpful if your expected income is growing and you want your investment contributions to grow over time.

When looking at your SIP, neither approach is right or wrong. An important consideration may be if the SIP amount you chose fits your budget and helps you accomplish your goals over the planned investment duration.

Your financial circumstances may change over time. What you consider your SIP may have to change, even if you are reviewing it to grow over time.

Conclusion

The differences between step-up vs flat SIP rest on how your contribution changes. In flat SIP, consistency and predictability are key. Step-up SIPs, on the other hand, allow contributions to increase at certain intervals.

If you foresee an increase in your income, consider a step-up SIP to lock in a part of your increased income toward longer term wealth creation. However, the step-up should be systematic and should not compromise other expenditures and savings.

Select the option you can adhere to consistently with your other financial goals in consideration.