Meet the game-changer in mutual fund investments, explains Anamika Pareek.
While regular SIPs have long been the go-to strategy for disciplined wealth creation, Top-Up SIPs take it a step further by aligning your investments with your growing income and inflation.
Imagine starting small and gradually increasing your SIP amount at regular intervals -- it's like giving your savings a boost on autopilot!
Whether you're saving for your child's education, buying your dream home, or planning an early retirement, a Top-Up SIP can get you there quicker than traditional SIPs.
Curious to know how this simple tweak to your SIP can make a big difference? Let's dive into the world of Top-Up SIPs and explore why they are a smarter, faster way to grow your wealth.
How can you save up for each of your goals?
Mutual funds are a convenient mode of investment, where you can invest as little as Rs 500 from your regular savings and start investing for your goals.
The sheer convenience of mutual fund investments like ease of investing, professional fund management, diversification offered are among some of the factors that have drawn investors to this instrument for over three decades now.
Mutual funds may have the potential to create wealth for investors over the long term.
Investments in mutual funds can be made in two ways -- as a lump sum (one-time investment) or through a Systematic Investment Plan or an SIP made at regular intervals like weekly, monthly, quarterly.
The Top up option in the SIP mode can help you reach your goals faster or conversely, create bigger corpus over long run. Let us understand how…
What is an SIP Top up Facility?
In the SIP Top up facility, you can increase the SIP amount by a predetermined rate or additional amount at stipulated intervals. There are two ways to do this.
- SIP Top up by a percentage: You can increase your SIP by any percentage at an interval of your choice.
- SIP Top up by an amount: Conversely, you may increase your SIP by a fixed amount, for example say by Rs 1,000 or Rs 5,000 at every interval.
There is no limit to the percentage or the amount which you choose for your top up. You can choose the interval at which the top up is initiated for your SIP as monthly, quarterly, half yearly or annually as decided by the fund house.
For example to understand the concept, let us say you had an SIP of Rs 10,000 in a mutual fund. If you choose the top up option, you will be required to specify what should be the rate of your top up or for what amount.
Let us say, you choose a rate of top up which is a little more than the inflation rate. So, you choose a top up of 10 per cent annually factoring in the annual inflation and align your salary increment to the increased amount you are committing to invest.
Therefore, your SIP amount with the top up facility will increase as follows:
The above calculation in illustration is shown for three years, and it continues like this till the tenure of the SIP.
Advantages of choosing the SIP Top Up facility
1. Financial discipline
The importance of discipline in achieving financial security cannot be understated. To quote legendary investor Warren Buffet, 'Do not save what is left after spending, but spend what is left after saving'.
Regular savings not invested usually get spent in avoidable or wasteful expenditure. As your incomes rise with annual increments, your savings also increase.
SIP Top-Up is a convenient mutual fund facility that will automatically increase your investments every year (or any other interval chosen by you). It is a kind of forced savings, which will keep you disciplined and help in achieving your financial goals.
2. Wealth creation
Your salary ideally increases throughout your career. There are performance bonuses and annual increments and at times you receive windfall gains. These increases in your income, if not invested judiciously, may end up being spent inadvertently and wastefully.
However, savings alone will not create a corpus. Your savings should be invested, for creating wealth. The wealth that you can create through SIP Top-Up of merely 10 per cent annually, for example, is way more than what you can create through a plain SIP without the top up.
Young investors can especially benefit from this option, since they can start with a nominal SIP amount and then keep topping it up throughout their career, thereby can create creating corpus over long run. We will take an example to understand this better.
Example: Subhash started a monthly SIP of Rs 10,000. Ashish also started a monthly SIP of Rs 10,000 and opted for annual top-up of 10 per cent.
The chart below shows the difference in the corpus after 10 years.
Source: Advisorkhoj, AMFI, Mean CAGR returns considered for illustration is 12.64 per cent by taking mean of 10-year rolling returns between 1 June 2013 and 30 May 2023 of Sensex.
SIP investments on first day of every month for the stated periods have been considered for this illustration. SIP Returns are calculated on CAGR basis.
The above illustration is provided as per AMFI Best Practice Guidelines Circular No. 109 dated November 1, 2023 and as amended from time to time to define the concept of power of compounding.
Past performance may or may not be sustained in future and is not a guarantee of any future returns.
Investors should not consider the same as investment advice.
Please note the illustration above is purely for investor education purposes and should not be taken as financial or investment planning recommendations. Consult with your financial advisor before investing.
3. For relatively faster achievement of goals
SIP Top-up is particularly beneficial to the investors who want to build up a corpus. Refer to the table given below that will show you that by choosing a progressively higher percentage for your SIP Top Up facility, you can create corpus.
With a SIP Top Up plan you can aim to reach your financial goals faster.
Let us assume your goal was to create a corpus of Rs 2 crore.
Source: Advisorkhoj, AMFI, Mean CAGR returns considered for illustration is 12.64 per cent by taking mean of 10-year rolling returns between 1 June 2013 and 30 May 2023 of Sensex.
SIP investments on first day of every month for the stated periods have been considered for this illustration. SIP Returns are calculated on CAGR basis.
The above illustration is provided as per AMFI Best Practice Guidelines Circular No. 109 dated November 1, 2023 and as amended from time to time to define the concept of power of compounding.
Past performance may or may not be sustained in future and is not a guarantee of any future returns.
Investors should not consider the same as investment advice
Please note the illustration above is purely for investor education purposes and should not be taken as financial or investment planning recommendations. Consult with your financial advisor before investing.
Things to remember while choosing the SIP Top Up facility
Once you decide to start SIP Top-up plan, the only way to stop the facility is to cancel the SIP and start a new one.
However, you can cap the SIP amount at the beginning. This will make your Top-Up option automatically continue increasing according to the amount/percentage you have chosen and stop after your SIP amount reaches the capped amount. The SIP will continue with the capped amount for the tenure of the plan.
As per current guidelines, you can specify the tenure of SIP Top-up for a maximum period of 30 years.
Contact your financial advisor or mutual fund distributor to understand more about the SIP Top Up facility on your mutual fund scheme and start investing today and aim for a fruitful investment journey.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this QnA or an attempt to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
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