Have you come across the term top-up SIPs a lot of times? Are you unsure what it means? We aim to simple that out for you. Read on to know more about top-up SIP investments.
What does top-up SIP mean?
Top-up SIP allows investors to alter their investment amount at regular intervals. Also known as step-up SIP, an investor can increase their investment amount by a fixed percentage or amount. The increase in investment amount is often linked to growth and future income. Basically, an individual’s income or salary is likely to grow with time. Increase in cash inflows should also mean increase in savings and ultimately investments.
Difference between traditional SIP and top-up SIP
Traditional SIP does not allow investors to alter their investment amount. Also known as vanilla or plain SIP, under conventional SIPs a fixed amount is deducted from an investor’s bank account for a fixed duration at regular intervals. If they wish to alter their investment amount, they would have to either make a lumpsum amount or start a new SIP investment. Contrary to that, step-up SIPs allow investors to systematize their SIP investment amount.
How does a top-up SIP work?
An investor can top-up their investment amount either by a fixed percentage or a fixed number.
Let’s understand the working of top-up SIPs with the help of an example. Priya wants to save for her child’s higher education in 20 years. She begins a monthly SIP of Rs 5,000 is equity mutual funds that offers average returns at 10% per annum. Using SIP calculator, she figured that she would accumulate around Rs 45.5 lakh after 20 years. However, if Priya tops up her SIP investment by just 10% per annum, she would end up accumulating the same corpus in less than 16 years. This means that just increasing the SIP amount by 10%, Priya would save 4 years. Further, if she would have continued to invest for the entire investment duration of 20 years, she would end up accumulating Rs 97.26 lacs! This is almost twice the amount of what she would accumulate had she invested in conventional SIPs.
Advantages of top-up SIP
Here are a few benefits of step-up SIP:
- Helps reach financial goal faster – As you can see in the above example, a top-up SIP helps to reach financial goals quicker. This is because investment amount and investment duration are inversely proportional to each other. So, if you increase the investment amount, the investment duration is bound to decrease.
- Helps to fight inflation – Several investors decide to increase their investment amount in an attempt to achieve inflation-beating returns. As inflation has a tendency to regularly eat away a part of your returns, it makes sense to increase your investment amount for a prolonged duration.
- Helps to adjust to rising income – An individual usually experiences an hike in their salary or income over time. It usually increases on an annual or semi-annual basis. Step-up SIPs help to adjust to this rising income and maintain the ratio of income vs savings.
- Helps to continue to an existing scheme – If you would have invested in a conventional SIP and later wishes to increase your SIP amount, you would have to start a new SIP. Top-up SIPs saves you the troubles and hassles of starting a new SIP investment.