The Magic of Compounding with SIPs

The allure of systematic investment plans (SIPs) stems from the powerful mechanism of compounding, which can exponentially grow investments over time. Primary among SIP types is the ‘step up sip,’ a variant that involves gradually increasing investment amounts at regular intervals. This small yet effective adjustment can significantly enhance one's financial corpus, making it a sought-after strategy among investors.

A step up sip typically starts with a modest monthly investment— for instance, INR 5,000. The magic unfolds when this amount is incrementally increased, say, by 10% annually. Primary calculations elucidate this compounded growth. In an ordinary SIP with a consistent investment of INR 5,000 monthly at an assumed rate of return of 12% per annum, the total investment in 20 years would be INR 12 lakh. The corpus would potentially grow to approximately INR 50 lakh due to compounding.

Introduce a step up sip, increasing the investment by 10% each year. The first year involves investing INR 5,000 per month, totaling INR 60,000 annually. The next year, monthly investment rises to INR 5,500, adding up to INR 66,000 annually. By consistently escalating the investment amount this way, the power of compounding multiplies. Over 20 years, the total investment would sum up to around INR 38 lakh. Assuming the same annual return of 12%, the corpus could escalate to approximately INR 1 crore or more, underscoring the potent impact of a step up sip on wealth creation.

Secondary considerations, such as inflation, must be factored in. A systematic rise in investments combats inflationary pressures, ensuring that future financial goals remain attainable. Furthermore, integrating a step up sip into one's investment strategy can smoothen the psychological burden of committing larger sums upfront, making wealth accumulation a gradual and manageable process.

Investors fascinated by the potential of compounding with SIPs should acquaint themselves with both the benefits and drawbacks of trading in the Indian financial market. Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should perform thorough research and consider their risk appetite before opting for any investment strategy.