5 Reasons to Opt for SIP Top-up
By Akhil Chugh
Date October 17, 2021
At Net Brokers, we always recommend revising financial goals, shifting asset allocation and reviewing the investment strategies at regular intervals for building wealth. Regular review of the financial plan is not only important in case of an emergence of a new goal or shift in financial liabilities but frequent evaluations are also recommended because of changes in your income – if you are saving and investing the same amount that you used to set aside five years ago despite your salary having increased exponentially, you are losing the opportunity to earn significantly higher returns.
With a traditional Systematic Investment Plan (SIP), you invest a fixed amount of money, say, ₹10,000 a month. But when your income grows and you can save ₹20,000 per month, you will have to start a fresh SIP for the additional amount.
There is an easier solution and it’s called Top-up SIP, also known by names such as Step-up SIP or SIP Booster.
What is SIP Top-up?
Systematic Investment Plan (SIP) is an investment route offered by mutual funds allowing investors to invest a small amount regularly in the preferred mutual fund scheme. The investment can be made weekly, monthly or quarterly. SIP is an effective wealth-building investment tool allowing to beat market volatility through rupee cost averaging of acquisition cost.
SIP Top-ups is an option available to SIP investors wherein they can automatically increase their SIP contributions in the fund they are already investing in. As investor’s income grow with time, they are more likely to have more sum available for investments. SIP Top-ups allows these investors to increase the investment amount periodically.
- SIP Top-up is a facility wherein an investor has an option to increase the amount of their SIP installment by a fixed amount or percentage at predefined intervals.
- This increase is linked to future income and growth.
- Investors can specify the upper limit to cap the top-up. Topping-up the SIP will stop when the defined cap is reached.
- Also called SIP Booster or SIP Step-Up facility.
SIP vs SIP Top-up – A case study:
Suppose, Harsh & Kapil are two friends. They want to save money for their retirement which is due in 25 years. They decide to start a SIP in a chosen mutual fund scheme. Harsh decides to invest Rs 25,000 each month while Kapil opts for SIP Top-up and decides to invest Rs 25,000 per month with a monthly top-up of Rs 2500 every year.
Assuming a CAGR of 12% p.a., Harsh was able to accumulate Rs 4.7 crore at the end of 25 years while Kapil was able to accumulate Rs 13.0 crore at the end of the same time frame.
A small monthly increment of Rs 2500 made a difference of Rs 8.3 crore in their accumulated wealth!
Below is the graphical representation of two strategies:
Reasons to opt for SIP Top-up:
1. Adapts to rising income:
Investment is a direct function of income. Most people expect an annual salary hike or a rise in business income over time. If you Top-up your SIPs annually by the expected increase in your income then it auto adapts to your rising income. Thus, the SIP top-up facility is an efficient way to keep your savings grow in line with your income.
2. Helps to fight inflation:
Inflation is a situation of declining purchasing power of money. The current average annual inflation rate in India is approximately 6.2%. As time passes, the value of your savings gradually decreases. Traditional savings plans do not offer a hedge against inflation. The best way to hedge against inflation is to increase your investment in equities.
As inflation consistently erodes the value of your money it is advisable to raise contributions to an investment plan for the long term. Thus, SIP Top-ups serve as an effective tool to keep pace with rising inflation.
3. Provides operational convenience:
Top-up SIP works on an autopilot mode – it helps you save from the hassles of opening new SIP accounts every time there is an increase in income and you want to increase your SIP installment. Starting a new SIP would require you to go through the additional hassle of tracking or managing multiple SIPs. You may not have the time to research a new investment opportunity. Also, managing multiple SIP accounts can be cumbersome.
Top-up SIP helps you increase the SIP amount in the same scheme automatically based on the option given by you while signing up the SIP Top-up form. Thus, a top-up SIP keeps the investment consolidated.
4. Help reach financial goals faster:
SIPs are designed to help you achieve your long-term financial ambitions. A top-up facility allows you to reach your financial goals faster or expand your goals to meet your needs.
Let’s understand it with an example.
Suppose, Karan wants to save money for his retirement home in 30 years. He decides to start a SIP in a chosen mutual fund scheme. By investing Rs 25,000 each month and assuming a return of 12% p.a., Karan can reach a corpus amount of Rs 8.8 crore in 25 years.
However, if Karan decides to top up his monthly SIP amount by Rs 2500 every year, he can increase the accumulated corpus amount to Rs 28.2 crore in the same time period of 25 years. Now, Karan can afford to buy a larger retirement home.
5. Boost growth in your corpus:
SIP in mutual fund works on the principle of compounding interest or compounding growth. It implies that return is calculated based on the previous principal amount and past accumulated interest.
So, when investors increase the principal amount, it boosts the interest income and the new principal. The result is a substantial rise in returns.
Net Brokers Takeaways:
- The investor has to opt for the Top-up SIP option while enrolling for the SIP facility.
- It is a smart saving solution if you want to create a higher corpus for your life’s goals.
- New investors can choose Top-up SIP option to start investing an affordable amount in mutual funds initially and then gradually increase their investments as their income and knowledge grows.
- The top-up facility works best when you use it to build allocation for a preferred asset class over time. This way, you can reach your desired asset allocation levels quickly.
- We believe that top-up SIP can help your investments match your income, beat inflation and reach your goals sooner with lesser operational hassles. Thus, it helps you stay flexible and regular with your investments at the same time.
To sum up, while all the above facilities add to the convenience and flexibility provided to investors, the golden rule for investing is to stay invested for a longer time horizon to let the benefit of compounding reflect.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
Happy SIPs!