SIP top-up refers to the facility provided by the mutual funds, wherein the Systematic Investment Plan (SIP) instalment is increased by a fixed percentage or fixed amount after specified intervals.
Over the last few years, SIP has gained popularity as one of the effective tools for long-term wealth accumulation. It helps investors to invest a fixed amount (say, Rs 10,000) at a fixed interval (say, monthly), which brings discipline in investing and can help them to build wealth over periods.
Fixed or variable
SIP top-up is an add-on facility offered by mutual funds, wherein the amount of SIP instalment can be increased at fixed intervals as investors prescribe. It offers two options, i.e., fixed SIP top-up and variable SIP top-up (fixed percentage). Under fixed SIP top-up, the SIP amount is increased by a fixed amount at pre-determined intervals. Under variable SIP top-up, the SIP amount is changed by a fixed percentage as opted by the investors after a prespecified period, i.e., half-yearly or yearly.
For example, if an investor starts with an SIP of Rs 10,000 per month and selects an annual top-up amount of Rs 1,000, then after one year, the monthly SIP amount will increase to Rs 11,000 per month, and so on. This increase will continue at regular intervals (in the above example, it is every year) as per the investor’s instructions until the investor stops or changes the top-up feature. Some mutual funds allow capping of the SIP amount, where top-up SIP converts into a fixed amount SIP on reaching the target.
Reach goals faster
With a SIP top-up, investors can increase their monthly instalment amount periodically, which can help them to reach their investment goals faster. So, for example, an investor looking to accumulate a specific corpus for retirement can achieve that target amount much earlier by opting for the SIP top-up facility and retire early.
A SIP top-up is particularly useful for investors who expect increase in income. It allows them to start with a small investment and gradually increase it as income grows. This is specifically useful for young investors who have just started their career and do not have sizeable monthly surplus money (after accounting for all the expenses) to invest every month but expect their salaries to grow over time.
One of the benefits of SIP is that it brings discipline to investing. An SIP top-up helps you extend that discipline on your expected higher future surplus money as well. By committing higher future monthly instalments in advance, you can avoid the mental stress of having to decide on where to invest the additional surplus money every year.
- An add-on facility from mutual funds, SIP top-up allows the SIP instalment amount to be increased at fixed intervals
- This helps you extend fiscal discipline on your expected higher future surplus money as well
The writer is associate director, co-head product strategy, WhiteOak Capital AMC