With salary appreciation letters being distributed, mutual fund distributors are suggesting individuals consider using a step-up systematic investment plan (SIP). This advanced SIP automatically enhances the SIP amount by a set percentage or value at every SIP anniversary.
After every anniversary, you can save an additional 5-10-15% to ensure your savings increase in line with your income. You can also choose to increase the amount, such as ₹500, ₹1,000, or more, automatically without having to trigger an enhancement in the SIP amount.
“Step-up SIPs avoid the lethargy involved in converting salary increases lying idle in the bank account to investments. It ensures one saves 5-10% additional without any manual intervention, instead of increasing expenses in tandem with salary raises,” says Suresh Sadagopan, founder of Ladder7 Wealth Planners.
The seamless approach of saving more each year helps investors avoid wasting time weighing the pros of increasing lifestyle expenses or managing within the same means.
Step-up SIPs: A smart strategy to maximise returns
For example, imagine an investor saving ₹10,000 each month for 60 months under a normal SIP. She would have accumulated ₹6 lakh, which would grow to ₹7.74 lakh if one extrapolates using an estimated return of 10%. However, if she uses a 5% step-up every year, the accumulated amount increases to ₹6.63 lakh, which grows to ₹8.47 lakh in the same 60 months at the same 10% returns.
“We have observed that investors somehow manage the expenses when an elevated amount is automatically invested. Psychological aspect of managing within the means forces even the undisciplined to save for their goals that require a probably 5-7% additional SIP amount every year,” Sadagopan adds.
While step-up SIPs offer benefits, some advisors caution about the long-term impact, especially when salary increases do not meet expectations or living expenses rise due to ageing parents and growing children.
Healthcare costs are anticipated to rise 13% in 2025, per Aon’s Global Medical Trend Rates Report 2025. Also, personal expenses double as a child crosses 5-year buckets, while school fees are rising at the rate of 18-20% annually in metros.
Nevertheless, if you find this tool useful to ensure you do not fall out of the habit of saving and wish to use it for enhanced savings, exercise caution with the percentage or amount increase, especially if you approach investing the DIY way– just like 101.1 million SIPs accounts using the direct plan route (non-commission based online or through fintech).
Note that once you set a higher SIP limit at each anniversary, you cannot reduce the SIP amount under the step-up SIP.
“Those with a 50,000 step-up SIP might start feeling the pinch in the fourth or fifth enhancement when the SIP amount increases to ₹65,000 per month, “Says Sadagopan.
Managing cash flow: The risk of over-extended SIP amounts
In the third or fourth year of a step-up SIP, the accelerated SIP amount may be difficult to manage from a cash flow perspective.
“With DIY investors, managing the additional cash flow is a challenge, in case one forgets the SIP anniversary date, when the higher amount kicks in,” says Ajay Sehgal, founder and managing director of Allegiance Financial.
If the balance is not maintained in the bank account according to the enhanced amount, SIP bounce charges of ₹350- ₹700 will be applicable. These charges could reduce mutual fund returns to the extent of penal charges.
To avoid this, set reminders for your step-up SIP anniversary or use an app with built-in technology. If funds are scarce, you can pause or stop the SIP.
“To reduce the amount of the step-up SIP, one needs to close the existing SIP mandate and then apply for a fresh SIP mandate with the optimum amount of SIP instalment. However, the cancellation request should be sent seven business days prior to the day of the SIP date,” says Sehgal.
Also, while starting a fresh SIP, remember to quote your existing folio number with a fund house to ensure you are able to trace all your units of a particular fund under the same folio, even if the SIP dates are different.
Another disadvantage of step-up SIPs is that investors tend to ignore portfolio reviews and alter their investments based on the scheme’s performance.
While no charges are incurred in cancelling an SIP and restarting a fresh one, there is a way to ensure that you do not face the hassle of maintaining a higher cash flow. Instead of opting for an in-built step-up SIP, one can add an additional SIP based on the actual increase. This ensures you save the higher amount based on the scheme’s performance, and you aren’t taken by surprise.
“You can align the additional SIP based on the date of appraisals, your cash flow and the date that you would prefer,” says Sehgal.
