What is a step-up SIP, and how much difference does it make?

A step-up SIP is a SIP whose monthly amount rises by a set sum or percentage at fixed intervals during the SIP. It does not change what the fund earns. It changes how much you put in, and the extra money has time to grow.

That second part is where people get misled. In the 10-year examples below, most of the bigger end amount comes from the extra money paid in. A smaller part comes from that money growing. The figures below show both, with the amount invested beside every end value.

What is a step-up SIP?

A step-up SIP is a SIP that lets you raise the instalment by a fixed amount or a fixed percentage at pre-defined intervals. That is how one scheme document describes the facility, which it calls SIP Top-up. Step-up and top-up mean the same thing here.

A plain SIP means investing a fixed amount at regular intervals, usually monthly. Each instalment buys units at that day's NAV, which is the price of one unit of the fund. If you want the basics first, read what a SIP is and how it works.

Stepping up does not merge your instalments into one big purchase. Each stepped-up instalment is still a separate purchase, with its own NAV, its own allotment date and its own holding period. The holding period is how long you have owned a unit, and it decides whether a gain is short-term or long-term. How SIP returns are taxed explains the tax on each instalment. For an ELSS fund, each instalment also has its own three-year lock-in, a period when you cannot sell at all.

How does a step-up SIP work?

The fund house sets the terms. SEBI has no rule on SIP dates, frequencies or tenure. These details are set in each scheme's documents.

For example, one fund house's scheme document offers two kinds of step-up:

• A fixed top-up, with a minimum of ₹1,000 and any rupee amount above that.
• A percentage top-up, at 5%, 10% or 15%, and higher multiples of 5%.

The same document fixes the frequency at yearly or half-yearly. If the SIP itself is quarterly, only the yearly step is available. You can also set a cap, by an amount or by a month and year. Once the SIP reaches the cap, the instalment stays level until the SIP ends. For a percentage top-up with no cap chosen, that fund house applies a default cap of ₹10 lakh.

That scheme document also says the step-up has to be ticked on the SIP form, with a frequency chosen. If it is not, the step-up may not be registered.

Where the mandate comes in

Your bank mandate sets the most the fund house may collect in one debit. A stepped-up instalment still has to fit under that limit, so the limit needs room for the largest step you plan.

In that same scheme document, the cap cannot be higher than the maximum on your bank mandate. If the two differ, the lower amount is used as the cap. So a stepped-up instalment cannot go above the mandate's ceiling. To invest more than that, the mandate limit has to be high enough, or a new mandate has to be registered. Our guide to the one-time mandate covers the mandate itself.

How much difference does a step-up make?

It makes a large difference to the end amount, and in these 10-year examples most of it is money you added yourself. Here are three ways to run a SIP for 10 years. Every return is assumed at 12% a year, worked out as 1% a month. Each instalment is made at the start of the month.

The 12% is an assumption for illustration. It is not a forecast and not a past return. It sits below the 12.42% that AMFI, in its guideline for its members, prescribes for equity fund illustrations based on the Nifty 50. Past performance may or may not be sustained in future. At 0%, each value is simply the amount invested.

The figures are worked out the same way as our SIP calculator, which shows a flat SIP at a return you choose. The calculator has no step-up input, so use it for the flat row only.

Where the extra comes from

The ₹500-a-year SIP ends ₹4,10,983 above the flat SIP. Of that, ₹2,70,000 is extra money you put in. The other ₹1,40,983 is growth on that extra money.

The 10% version ends ₹3,15,281 above the flat SIP, and ₹2,13,747 of that gap is extra money put in. The rest is growth on it.

So about two-thirds of the ₹500 step-up's extra is money you put in yourself. The fund did not earn a different rate in any row. All three used the same assumed 12%. The only thing that changed is how much went in, and for how long. For more on how money left invested grows over time, see how compounding works.

SIP or step-up SIP: which is better?

Neither wins on its own. A flat SIP and a step-up SIP in the same fund earn the same return. The step-up puts in more, so it ends with more, and it asks more of your monthly budget. The table shows both sides: the higher value and the higher amount invested.

The rate itself is only a label in the table. This guide on SIP interest rates explains what a return assumption in a calculator means.

Can you step up an existing SIP?

It depends on the fund house. The scheme documents that describe the facility have you choose the step-up on the SIP form, when the SIP is set up. Some fund houses let a SIP be changed in place under a one-time mandate, and others treat a change as a new SIP. A new amount still has to fit within the mandate's ceiling.

Koshex customers can pause, cancel, change the amount of, change the date of, and step up a SIP on Koshex. How to stop or pause a SIP covers changing the amount or the date.

There is also a fallback that needs no step-up facility. You can ask to raise the amount, or start a second SIP in the same fund. The same investor can hold a SIP and also make lump-sum purchases in the same scheme. Each is a separate purchase at that day's NAV.

When does a step-up SIP make sense?

It suits a situation where your income rises with some regularity and your budget has room for the later, larger instalments. This is not advice to pick any step-up rate. Raising the SIP when income rises is one way to invest more over time. These are the factors to weigh.

• Your income. A step-up only works if you can keep paying it. In the ₹500-a-year example, the last instalment is ₹7,500, which is two and a half times the first.
• Your goal's distance. The extra instalments need time to grow. How much to invest each month looks at this from the goal's side.
• The fund's risk. A step-up does not change the fund's riskometer. The riskometer is the risk label SEBI makes every fund show, on six levels from Low to Very High. Is a SIP safe? goes through what decides a SIP's risk.

Koshex helps you choose a fund that suits your goal and timeline, and the step-up then sits on top of that choice.

What to check before you set one up

Check the fund house's own terms before you tick the box. Four things matter.

1. The step-up terms. Ask about the frequency, the minimum step and the cap, because they differ by fund house.
2. The mandate's limit. It has to allow the largest instalment you expect, including the step-ups.
3. What a pause does. One scheme document gives an example. A SIP of ₹5,000 with a ₹1,000 top-up resumes at ₹6,000 if the pause ends after the top-up date.
4. The lock-in, for ELSS. Each instalment keeps its own three-year lock-in, counted from its own purchase, so later instalments come free of the lock-in later. See what to do when an ELSS lock-in ends.

To start from the fund side, browse the mutual funds on Koshex.