The benefits of a Systematic Investment Plan (SIP) in Mutual Funds are widely known by now. But not many know of a SIP Top-Up facility wherein an investor who has enrolled for SIP has an option to increase the amount of their SIP instalment by a fixed amount or percentage at predefined intervals. This increase can be linked to future income and growth. Investors can specify the upper limit to cap the top-up either in terms of the amount or the month and year. Topping-up the SIP will stop when the defined cap is reached.
A top-up facility is an efficient way to keep your savings growing in line with your income. Using a top-up facility, an investor can increase their monthly contribution in an ongoing SIP. While most mutual fund houses refer to it as Top-Up, some others call it SIP Booster or SIP Step-Up facility. Most prominent fund houses offer this facility to investors.
Some of the key advantages of a top-up SIP include its ability to help your savings keep pace with the rise in inflation. Although this sounds innocuous, it plays a vital role in ensuring one is not left with idle funds that do not work towards beating the inflation rate.
Then, top-ups provide operational convenience as there is no need to submit a fresh ECS Bank Debit Mandate in order to top-up existing SIPs. At the same time, one should note here that once they opt for the SIP top-up facility no modification can be made to the same. The investor will have to cancel the current SIP and enrol for a new one.
SIP top-ups can help investors reach their financial goals faster as they incrementally accumulate towards the goal target amount sooner than the originally projected time frame. Again, most salaried individuals expect a yearly salary hike and may get bonuses on an annual basis. A SIP top-up option increases the investment of one’s savings, alongside salary growth.
Check the above table about the numerical impact that a SIP top-up could potentially have on a performing mutual fund scheme over a longer time frame. The results are worth noting.
The numbers speak for themselves. The impact of a marginal top-up in the above illustration resulted in doubling of corpus.
Of course, the key lies in selecting a mutual fund scheme that will perform over a 15-year time frame. There is no dearth of such schemes in the Indian mutual fund universe but to select them, one would do well to seek professional advice.
Option 1 :
Only SIP
SIP Rs 10k p.m.
Corpus after 15 years @ 12% CAGR: Rs 47.5 lakh
Option 2 :
SIP + TOP-UP SIP Rs 10k p.m.
Top Up Rs 2k p.m.( further increased yearly too by additional Rs 2k p.m.)
Corpus after 15 years @ 12% CAGR: Rs 95 lakh
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)