Step-up vs flat SIP, worked through
The two SIPs
- Flat: ₹10,000 on the 1st of every month for 20 years.
- Step-up: ₹10,000 a month in the first year, then 10% more each year: ₹11,000 in the second, ₹12,100 in the third, and so on.
Both earn 10% a year, which Pocket works as 0.7974% a month (10% compounded: 1.101/12 − 1), and each instalment is counted at the start of its month. The month-by-month working is below.
Side by side
| Years | Flat: paid in | Flat: corpus | Step-up: paid in | Step-up: corpus | Step-up SIP that year |
|---|---|---|---|---|---|
| 5 | ₹6,00,000 | ₹7,71,717 | ₹7,32,612 | ₹9,25,350 | ₹14,641 |
| 10 | ₹12,00,000 | ₹20,14,576 | ₹19,12,491 | ₹29,80,572 | ₹23,579 |
| 15 | ₹18,00,000 | ₹40,16,212 | ₹38,12,698 | ₹72,00,363 | ₹37,975 |
| 20 | ₹24,00,000 | ₹72,39,867 | ₹68,73,000 | ₹1,54,61,674 | ₹61,159 |
The step-up SIP's corpus after 20 years is 2.1 times the flat one's, with 2.9 times as much paid in: ₹68,73,000 against ₹24,00,000. The rupees paid in later have grown for fewer years, which is why the corpus rises by less than the amount paid in.
How much the step matters
The same ₹10,000 a month for 20 years, with the step-up at four levels:
| Yearly step-up | SIP in year 20 | Paid in | Corpus |
|---|---|---|---|
| none (flat) | ₹10,000 | ₹24,00,000 | ₹72,39,867 |
| 5% a year | ₹25,270 | ₹39,67,914 | ₹1,03,00,021 |
| 10% a year | ₹61,159 | ₹68,73,000 | ₹1,54,61,674 |
| 15% a year | ₹1,42,318 | ₹1,22,93,230 | ₹2,43,68,521 |
To reach the ₹1,54,61,674 that the 10% step-up gives, a flat SIP would have to be ₹21,356 a month from the first month (2.1 times ₹10,000).
The first two months, worked through
- Month 1: ₹10,000 × (1 + 0.7974%) = ₹10,079.74.
- Month 2: (₹10,079.74 + ₹10,000) × (1 + 0.7974%) = ₹20,239.86.
- Each month after: (the balance + that month's SIP) × (1 + 0.7974%); the SIP rises by 10% every twelfth month.
In today's money
Prices rise too. At 6% a year, ₹1,54,61,674 20 years from now buys what ₹48,21,023 buys today. The projection is in the rupees of the year it is reached, and so is the SIP paid in: ₹61,159 a month in year 20 is ₹19,070 in today's money.
What the projection assumes
- One return, 10% a year, every year, after costs: no bad years, and nothing taken out.
- A step-up that is paid. The step-up SIP needs ₹61,159 a month by year 20; the projection takes it that income has risen to pay it.
- The first SIP counted at the start of month 1. A SIP that starts mid-month, or is skipped, changes the figures.
How Pocket works it out
The figures on this page are Pocket's own, from its planning engine when the page was built: the flat and the step-up projections the Goals page draws (a flat SIP and one with the yearly step-up you set), with sliders for the monthly SIP, the years and the step-up. The Goals page starts from a 10% step-up.
Questions
What is a step-up SIP?
A SIP whose amount is raised by a fixed percentage once a year, so that it keeps pace with pay rises. A 10% step-up on ₹10,000 a month makes it ₹11,000 a month in the second year, ₹12,100 in the third, and so on.
Is a SIP counted at the start or the end of the month?
Pocket counts each SIP at the start of its month, as a SIP debit is, so the instalment earns that month's return. A SIP counted at the end of each month would come to a little less.
Does 10% a year mean a fund will return 10%?
No. 10% is the planning assumption the projection uses for every year; mutual-fund returns are not assured and differ from year to year. The page states it so the figures can be redone at another rate.
Sources
- AMFI: how a systematic investment plan works, and the top-up (step-up) facility some mutual funds offer
- Pocket's planning engine: the flat and step-up projections, each SIP counted at the start of its month, and the 6% inflation used for today's money
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