What is SIP and Sip top up?

What is SIP and Sip top up?

SIP mutual fund at present, is one of the most popular and convenient ways of making a mutual fund investment. The benefits of transparency, expert management, customisation and benefits from power of compounding makes it a favourable choice among investors. To invest in SIP, investors must have their mutual funds KYC done, choose the funds based on their risk appetite and financial goals. It is recommended by expert financial advisors to keep investing for the long term in order to truly benefit from the power of compounding. But, even after that, it might not be enough for investors to reach the desired goals, within a tenure. And, this is where one can use SIP top up. 

With times, our income levels change due to increase in business income or our salaries, leaving us with some extra money to invest. A SIP Top-up is a facility provided by AMCs, using which you can increase you mutual fund SIP contribution amount by a fixed percentage or a fixed amount annually over the original SIP amount.

Let us understand this through an example –

Rohan wants to invest in SIP a monthly amount of Rs 30,000 to build his retirement corpus for 25 years in an equity mutual fund and expects at least 12% return over this tenure. By investing Rs 30,000 monthly with assumed return of 12% p.a., Rohan is expected to have a corpus of approx Rs 5.69 Crores after 25 years, against total SIP contribution of only Rs 90 Lakhs.

Now, what if Rohan decides to Top-up his monthly SIP amount by 10% every year? 

He can create a corpus of approx Rs 15.62 Crores against an investment of Rs 1.98 Crores. That means an additional corpus of over Rs 9.93 Crores by increasing the monthly SIP contribution annually by just 10%. It is clear from this example that if one takes the initiative to slowly increase their rate of investment with time, the power of compounding works its magic to generate an amount that can help investors to aid bigger financial goals in the future. 

The above calculation was performed using a SIP calculator.

Advantages of Top up SIP

Convenient way to fight inflation – Due to the inflation the value of our investments erodes consistently over time, therefore, it is advisable and recommended to raise the SIP mutual fund amount contributions annually, equivalent to the inflation rate at least. 

Higher savings in tandem with rising income – We expect our income levels to increase annually by a certain percentage. If we Top-up our SIP annually by the expected increase in our income, then it auto adapts to our rising income.

Operational convenience – Top up SIP works on an auto pilot mode, thus saving from the hassles of opening new SIP accounts when you want to increase your SIP contribution. As starting a new SIP again and managing it separately can be cumbersome, you can opt for the top up SIP and increase the SIP amount in the same scheme and folio. 

Superior to a regular SIP – A top-up SIP provides benefit over a traditional SIP as you can raise the SIP contribution amount every year. While in the top-up SIP, the monthly SIP amount grows every year, in a traditional SIP, the SIP amount invested remains the same throughout the SIP period. 

SIP mutual fund is a convenient way for investors to start saving for their financial goals. Using a SIP calculator to plan your goals make things easy.