Featured in Economic Times on 02/01/2020

A few days ago, I met Ronak on my way back to Pune. Like most youngsters working in the IT sector, Ronak was also looking forward to an exciting life. He was unmarried, and had dreams of settling down soon and to retire early to enjoy life to the fullest. When he got to know that I am a personal finance strategist and a financial advisor, he wanted me to help him to achieve his financial goals.

I was impressed that he had a clear idea about what he wanted:
a) A solo trip to Spain (yeah, remember Zindagi Na Milegi Dobara?) in two years
b) Build a retirement corpus of Rs 5 crore in the next 20 years

However, Ronak knew they were not easy goals to achieve. He had already done some number crunching. He needs to invest around Rs 57,000 per month to achieve these two goals on time. The only problem: His current salary was Rs 75,000.
“How do I invest so much when my current salary is only Rs 75,000? It will leave me with less than Rs 20000,” he said.

“I need to save Rs 7,000 to Rs 8,000 per month for my solo trip to Spain. And Rs 50,000 per month for the next 20 years to create my retirement fund, assuming I get annual returns of 12 per cent,” he said.

I had seen this before. Having set up my base in Pune, the IT hub of Maharashtra and catering to many other clients across the globe, I had met several Ronaks before. They start out with zeal and dream in their eyes. The moment they realise they have set up an impossible dream to chase, they lose all hope and abandon their plans.

Is there a solution?
Of course, there is a solution every Ronak’s problem. I am quite sure you are familiar with the concept of Systematic Investment Plan (SIP), one of the best ways to invest in mutual funds. There is one flaw in it, though. It does not automatically capture the future increase in the investor’s income. One may suggest to start investing in a fresh SIP, but that would mean going through the entire process all over again. This is where the Step-Up SIP option, which will factor in the yearly increase in your SIP contribution, steps in.

Let’s look at Ronak’s case again. To create his retirement fund of Rs five crore in 20 years, Ronak thinks he must invest Rs 50,000 per month immediately through a regular SIP. What if he chooses the step-up option? In that case, he needs to invest half the money, just Rs 25000 per month, with a 10 % rise every year. Surprised?

I haven’t forgotten about his Zindagi Na Milegi Dobara trip. He needs Rs 2 lakh for it. Since it is a short-term goal, he can’t invest through SIP in an equity fund. Equity investments are suitable to meet long-term goals. Ronak will need to look at a debt fund and slightly larger investment: an SIP of around Rs 8,000-9,000 in a liquid fund.

How does step-up SIP work?
Look at the table below to find out what a huge difference can you make to your dreams by slowly stepping up up your regular investments. We are assuming an an annual increment hike of 10% on your monthly investments here. If you invest Rs 10,000 per month, the corpus you create in a period of 20 years at an assumed rate of return of 12% would be Rs 1 crore. However, by stepping up the amount by 10% every year, you can achieve a corpus of around Rs.1.98 crores.

Similarly, you will also see a huge difference between investing Rs 50,000 every month with and without step-up option. If you invest Rs 50,000 without the step-up option, you will be able to create a corpus of around Rs 4.99 crore. The same SIP with a step-up option of 10% every year will help to create a corpus of Rs 9.95 crore. So, look at the huge difference the step-up option can create in your life. Similarly, you can see the difference in corpus with or without step up for a monthly investment of Rs 25,000 and Rs 1,00,000

The strategy once again gave Ronak his dreams back. As we said our good-byes, I told Ronak to follow these important tips to manage his step-up mode smartly:

  • Make sure to start your step-up SIP today. It really doesn’t matter how small the percentage hike is going to be. The idea is to set it up ASAP and then look out to increase it based on your financial planning.
  • Being disciplined in your investments can make a huge difference in terms of money you can generate. Always remember that making money is not difficult, unless you are in a hurry.
  • Always think of savings in terms of percentage than an amount. For example, instead of thinking saving of Rs 50,000 per month, see to it that you are investing 30% of your income. You may think Rs 50000 is greater than 30 percent of Rs 75,000. But once you start fixating on a figure, you get stuck there. Instead, think of percentage of your income. This is where the step-up option comes handy.

Source: https://economictimes.indiatimes.com/mf/analysis/he-thought-his-small-salary-was-an-issue-then-he-got-to-know-about-step-up-sip-in-mutual-funds/articleshow/73041532.cms