Unlocking the Benefits of SIP Top-ups for Investors
By Akhil Chugh
Date October 15, 2023
In the realm of financial management, there’s an opportunity for a top-up in nearly every aspect of life, from reloading your mobile phone balance to refinancing your home loan or enhancing your health insurance coverage. But did you know that you can also give your Mutual Fund SIP a top-up?
Picture this: you diligently initiate a monthly investment in a Systematic Investment Plan (SIP) to secure a comfortable retirement fund. Suddenly, you find yourself with a welcome boost in your income or an unexpected windfall, and you’re keen to channel this extra money into investments rather than frittering it away. The conventional approach would be to establish an entirely new SIP.
Fortunately, there’s a more efficient solution at your disposal – the “Top-up SIP,” which also goes by names like “Step-up SIP” or “SIP Booster.” With this facility, you can effortlessly amplify your investment contributions in tandem with your rising income. By doing so, you can maximize the compounding effect, letting your wealth grow more rapidly over time.
At Net Brokers, we emphasize the significance of regularly reevaluating your financial goals, realigning your asset allocation, and reviewing your investment strategies. This isn’t just crucial when new financial objectives emerge or when your financial responsibilities shift; it’s equally vital when your income experiences growth. Sticking to the same investment amount you set aside years ago, despite substantial salary increases, could mean missing out on the opportunity to earn significantly higher returns.
In a traditional Systematic Investment Plan (SIP), you commit to investing a fixed sum, like ₹30,000 per month. However, when your income surges, and you can comfortably save ₹50,000 each month, the conventional route would involve creating a new SIP for the additional amount.
But there’s a simpler, more convenient solution – the Top-up SIP. In this article, we’ll delve into what SIP top-up entails and explore its myriad benefits.
What is SIP Top-up?
Systematic Investment Plan (SIP) serves as a valuable investment avenue offered by mutual funds, empowering investors to contribute a modest sum on a regular basis to their preferred mutual fund scheme. SIP contributions can be made weekly, monthly, or quarterly, providing flexibility to suit your financial rhythm. SIP stands out as an effective wealth-building tool that shields investors from market fluctuations by employing rupee cost averaging, ensuring that they acquire units at varying costs over time.
For those looking to supercharge their investments, there’s an enticing option known as SIP Top-ups. This feature caters to SIP investors by enabling them to automatically boost their SIP contributions within their existing fund. As an investor’s income grows over time, they naturally find themselves with additional funds to allocate to investments. SIP Top-ups allow these investors to incrementally increase their investment amount.
Here’s a closer look at SIP Top-ups:
- Flexible Incremental Investments: SIP Top-up is a convenient facility that empowers investors to elevate their SIP installments by a fixed amount or a percentage at predefined intervals. This increment is directly linked to their future income and financial growth.
- Control Over Investment Limits: Investors have the liberty to set an upper limit, effectively capping the extent to which their SIP can be topped up. Once this defined cap is reached, the top-up contributions cease, granting investors precise control over their investment strategy.
- Also Known As SIP Booster or SIP Step-Up: You might come across SIP Top-ups under alternative names such as SIP Booster or SIP Step-Up, all referring to the same valuable feature that paves the way for smarter, adaptable investing.
In essence, SIP and SIP Top-ups together offer a robust investment strategy for harnessing the potential of your financial resources and adapting to your evolving income, ultimately helping you achieve your wealth-building goals.
SIP vs SIP Top-up – A case study:
Let’s consider the story of two friends, Mr. Rocket and Mr. Balloon, who are both planning for their retirement, set to occur in 25 years. They decide to kickstart their retirement savings journey with a Systematic Investment Plan (SIP) in a mutual fund scheme. However, their investment approaches differ significantly.
Mr. Balloon opts for a consistent monthly investment of Rs 40,000, while Mr. Rocket takes a more dynamic route with SIP Top-up. He starts with the same Rs 40,000 monthly investment but adds an annual top-up of Rs 4,000 to his SIP.
Assuming a Compound Annual Growth Rate (CAGR) of 12% per annum, the outcomes are astounding. Mr. Balloon accumulates a respectable Rs 8 crore in his investment account by the end of 25 years. On the other hand, Mr. Rocket, with his SIP Top-up strategy, achieves a substantial Rs 21 crore over the same time span.
It’s remarkable to note that this seemingly small monthly increment of Rs 4,000 results in a staggering Rs 13 crore difference in their accumulated wealth! This underlines the incredible power of strategic investment planning and the potential impact of modest, consistent enhancements over time.
Below is the graphical representation of two strategies:
Why investors should opt for SIP Top-up?
1. Adapts to rising income:
Investing is inherently linked to your income. It’s a common expectation for individuals to anticipate annual salary raises or business income growth. By incorporating an annual SIP Top-up aligned with your projected income increases, your investment strategy naturally adapts to your rising earnings. This makes the SIP Top-up feature an effective means of ensuring that your savings align harmoniously with your income growth, allowing your wealth to flourish in tandem with your financial success.
2. Helps to fight inflation:
Inflation can steadily erode the purchasing power of your money, and with the current average annual inflation rate in India at around 6.8%, it’s essential to address this issue. Conventional savings plans offer little defense against inflation. The most effective way to shield your finances from the adverse effects of inflation is to increase your equity investments.
As inflation persistently chips away at the value of your savings, it’s prudent to enhance your contributions to a long-term investment plan. In this regard, SIP Top-ups emerge as a valuable tool to help you stay ahead of rising inflation, ensuring that your wealth maintains its real value.
3. Provides operational convenience:
Top-up SIP operates seamlessly, eliminating the need to open new SIP accounts each time your income rises and you wish to boost your SIP installments. Establishing a new SIP involves additional paperwork, monitoring, and the potential challenge of managing multiple SIPs. Researching new investment opportunities can be time-consuming, and handling numerous SIP accounts can become unwieldy.
With Top-up SIP, you can automatically increase your SIP amount within the same scheme, as per your selected preference during the SIP Top-up registration. This approach ensures that your investments remain consolidated and hassle-free, freeing you from the complexities of juggling multiple accounts.
4. Help reach financial goals faster:
Systematic Investment Plans (SIPs) are carefully crafted to be your trusted companions in realizing your long-term financial aspirations. The inclusion of a top-up facility is akin to turbocharging your journey, enabling you to not only expedite your financial objectives but also broaden your horizons to accommodate your evolving needs.
Let’s illustrate this with an example:
Imagine Karan, who has a vision of securing his dream retirement home in 20 years. To manifest this vision, he opts to initiate a SIP in a chosen mutual fund scheme, committing to a monthly investment of Rs 50,000. With a projected annual return of 12%, Karan anticipates accumulating a substantial corpus of Rs 5.0 crore in two decades.
Now, consider an exciting twist to Karan’s strategy. Instead of sticking to a static SIP amount, he chooses to amplify his monthly contributions by Rs 5,000 every year. The result? An impressive leap in his accumulated corpus, soaring to an impressive Rs 11.6 crore within the same 20-year timeframe. This financial boost now empowers Karan to contemplate the acquisition of a more spacious and accommodating retirement abode.
In essence, SIPs, coupled with the compelling option of top-ups, are the catalysts that can accelerate the realization of your financial dreams and open doors to even grander ambitions.
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.
- As a good investment practice, make it a point to step up or top up your SIP investments when markets go down. It would facilitate better rupee-cost averaging while you endeavour to compound wealth.
In conclusion, the conveniences and flexibilities offered by the SIP top-up facility are valuable enhancements for investors. Nevertheless, the ultimate golden rule of investment remains unchanged: staying committed to your investments over an extended time horizon is the key to reaping the full rewards of compounding.
For further insights and guidance, don’t hesitate to reach out to us today! Begin your journey towards achieving your long-term financial goals by downloading our mutual fund app and embarking on your investment voyage.