From time to time we keep pointing out that there is nothing special about a mutual fund SIP. It neither enhances returns nor reduces risk. It is merely an automated way of buying mutual fund units on the same day of each month. In response to our latest article and video on the topic – What return can I expect from a 10-year equity MF SIP? – a viewer asked, “will a step-up SIP fare better than a normal SIP?”
A step-up SIP is one in which the investor keeps increasing the monthly SIP amount each year. In the above-mentioned article, we had pointed out that 10-year returns from a standard or normal SIP (where the monthly investment is fixed for the entire tenure) fluctuate a lot.
If the market moves up, the 10Y SIP return (XIRR) moves up. If the market crashes, the return also crashes. This means, we can expect any return we want, but the market will give us what it likes. This is why our investment strategy should depend on a variable asset allocation.
So the effective question the viewer asked is, if we cannot expect a set return from a normal SIP, will a step-up SIP fare better? In other words will a step-up SIP beat the returns of a normal SIP?
When we see an illustration like this, it is quite tempting to assume a step-up SIP offers higher reward.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Well, it does offer a higher reward to the salesguys and AMCs who bang the drums, but does it result in a higher return, a more predictable return for the investor?
The simple, intuitive answer to this is, no. There will be no difference in returns (XIRR) between a normal SIP and step up SIP. To appreciate this, consider two friends A and B who buy a mutual fund. A invested Rs. 1000 and B invested Rs. 2000.
After a year, the mutual fund NAV increased by 10%. So the market value of A’s investment is Rs. 1100 and B’s is Rs. 2200. Did B get a higher return than A? Of course not. They both got the same return of 10%.
(2200-2000)/2000 = (1100-1000)/1000 = 10%.
Just because we put in more money, does not mean the return is higher. Of course, the corpus is higher but not the gain. The same logic applies to a step-up sip vs a normal sip.
Yes, it is an excellent idea to increase the monthly investment amount each year. In fact, it is essential to invest as much as possible to beat inflation. See: What is your investing growth rate? The corpus will be higher than a normal SIP with a fixed investment. However, the return will be the same!
Let us consider 153 10-year rolling SIP return (XIRR) values for the Nifty 50 TRI.
For example:
- From 01-07-1999 To 01-07-2009: 19.23% (19.38%). That is the Normal SIP return was 19.23% and the 10% a year step-up SIP return was 19.38%
- From 02-08-1999 To 03-08-2009 20.59% (20.87%)
- From 01-09-1999 To 01-09-2009 20.11% (20.29%)
- …..
- From 01-03-2012 To 23-02-2022 14.50% (14.79%)
This is the full comparison.
There is practical no difference in returns! The step-up return is just as unprecitable as the normal SIP return. It must be understood that XIRR is an estimation process (using Newton-Raphson method) and not a precise calculation. The small differences are likely due to this.
In summary, it is vital that investors increase their inevstment as much possible from one year to the next. However, a step-up SIP does not provide a higher investment return than a normal SIP. It only results in a higher corpus.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter with the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)