SIP Top-up To Grow Your Wealth
By Akhil Chugh
Date August 14, 2021
There’s a top-up for everything in the world, well almost. Right from your mobile phone recharge, to your home loan, to your health insurance plans.
Did you know that there’s a Top-up even on your Mutual fund SIP?
Yes!
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 SIP Top-up works?
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 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.
Benefits of SIP Top-ups:
- Helps you reach your financial goals faster and you can expand your goals during the time
- Helps you in syncing your investments with increasing income
- Helps you to build a larger corpus
- Top Up automatically accounts for any inflation during the given time period
- A SIP can help you buy your dream home soon, while a top-up could give you the leverage to buy it sooner.
- Allows you to keep investing in an existing plan rather than the hassle of managing multiple SIPs with rising investible income.
Traditional monthly SIPs vs SIP Top-ups:
Suppose, Neeraj wants to save money for his retirement home in 25 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., Suraj can reach a corpus amount of Rs 4.2cr in 25 years.
However, if Neeraj decides to top up his SIP amount by Rs 2500 every year, he can increase the accumulated corpus amount to Rs 7.1cr in the same time period of 25 years. Now, Neeraj can afford to buy a larger retirement home.
Below is the graphical representation of two strategies:
Key Takeaways from Net Brokers:
- 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 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 and without any cost of acquisition of mutual fund units.
- 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.
- The current situation is not to create a panic, but to maintain calmness. As an investor make use of your past experiences. Keep in mind the situation and think about the situation one year down the line before disrupting or withdrawing your portfolio completely. Take the systematic accumulation and become a long-term investor to achieve your financial goals.
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!