Boost Your Returns with SIP Top-up
By Akhil Chugh
Date November 10, 2024
Investing in mutual funds through a Systematic Investment Plan (SIP) is an effective wealth-building tool in the long run. It is equally important to revise financial goals, shift asset allocation, and review investment strategies at regular intervals to achieve your investment objectives efficiently. 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.
Say, you start investing in a Systematic Investment Plan (SIP) every month to build a sufficient retirement corpus. To your surprise, you get a decent salary hike or make some extra income and wish to invest the additional amount instead of spending it every month. Now, a conventional option would be to start a fresh Systematic Investment Plan.
Thankfully, top-up or step-up facilities are available to let you increase your investment contribution with an increase in income. This way, you can fully leverage the power of the compounding effect.
Let’s learn what is SIP top-up & its benefits in detail.
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.
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.
How does SIP Top-up work?
The SIP Top-up amount can be either a specific percentage of your original SIP amount or even a predetermined fixed amount. The frequency of increasing the amount is typically half-yearly or annual.
Let us assume that you have a monthly SIP of Rs 25,000 in a mutual fund scheme. If you opt for a Rs 1,000 SIP top-up on an annual basis, your monthly SIP instalments will be Rs 26,000 after one year and Rs 27,000 in the following year. If you opt for a 10% SIP top-up on an annual basis, your monthly SIP instalments will be Rs 27,500 after one year and Rs 30,250 in the following year.
Thus, under the step-up SIP scheme, your SIP amount would increase by a specified amount every year, allowing you to step up your investments over time. You can also specify a maximum SIP amount, which would serve as the maximum limit to which the SIP would increase over time. When the increased SIP reaches the maximum specified amount, no more increase would be affected, and your investments would continue at the maximum amount.
A top-up facility lets the investor accelerate the timeline to reach the target corpus.
Traditional monthly SIPs vs SIP Top-ups:
Suppose, Mr. Ranbir wants to save money for his retirement home in 20 years. He decides to start a SIP in a chosen mutual fund scheme. By investing Rs 20,000 each month and assuming a return of 12% p.a., he reaches a corpus amount of Rs 2.0cr in 20 years.
On the other hand, if he starts his SIP of Rs 20,000 in the same mutual fund scheme but with a commitment to top up his SIP amount by Rs 2500 every year, he would be able to accumulate a corpus amount of Rs 5.3cr in the same time period of 20 years.
Now, with larger corpus Ranbir can afford to buy a larger retirement home and lead a comfortable retirement life by opting for a SIP Top-up to achieve his goals.
Key Takeaways from Net Brokers:
- The investor has to opt for the Top-up SIP option while enrolling in 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 step-up SIPs 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.
- Net Brokers believes 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 on your portfolio.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
Happy Investing!