At a recent online session I was conducting for students, amidst all the questions on cryptocurrencies and complex derivative strategies, I was pleasantly surprised to receive a more conventional question pertaining to mutual fund investing.
The young lady said she had already started investing a small amount of money monthly via the Systematic Investment Plan (SIP) route in a mutual fund scheme out of her earnings from a part-time job. After I congratulated her for being an early starter which is ideal, she raised her query about SIP Top-Ups and the advantages she might derive by using this approach.
Well, a SIP Top-up is a 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. The 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 keep 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 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 annual basis. A SIP Top-up option increases the investment of one’s Savings, alongside Salary growth.
Post the session, one of my young team members worked out the number impact that a SIP Top-Up could potentially have on a performing mutual fund scheme over a long time frame. The results were impressive. I am sharing the same below.
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 `10k p.m.; Top Up Rs 2k p.m. ( further increased yearly too by additional Rs 2k pm.)-- Corpus after 15 years @ 12% CAGR = Rs 95 Lakh
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 advise.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com