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How Top Up SIP Score Over Normal SIP

ICICI Securities 08 Apr 2022
  • Top-up SIPs can help increase your savings over a period of time
  • You won’t have to make any extra effort in terms of giving a new mandate or opening a new account
  • They help build the discipline to increase your savings regularly as your income goes up
  • However, most fund houses do not allow any tinkering with the mandate for top-up SIPs

You can invest in mutual funds using several ways. You may keep investing a lump sum amount in the chosen fund at regular intervals. Alternatively, you may take the systematic investment plan (SIP) route. If you wish to increase the SIP amount periodically without any hassle, you can go for top-up SIPs. Let’s understand how it works but before that let’s look at the benefits SIPs come with.

How SIPs Benefit Investors

SIPs involve investing a fixed amount of money at regular intervals rather than investing a lump sum amount in one go. This form of investing suits investors who don’t have bigger amounts to invest but want to keep investing in the market regularly.

By investing through SIPs, you do not attempt to capture the highs and lows of the market. Rather the cost of your investment gets averaged over a period of time. The essence of SIPs is that when the markets fall, investors automatically acquire more units. Likewise, they acquire fewer units when the market rises. This means that you buy less when the price is high and buy more when the price is low. Hence, the average cost per unit falls over a period of time.

For salaried investors, it makes sense to keep investing a fixed sum of money each month towards mutual funds. They can easily automate these investments by linking them with their savings or salary account.

Additional Read: Know How to Invest in SIP and its Importance

How Top-Up SIPs Work

In your regular SIP, you invest a fixed sum every month. However, if your income increases over a period of time and you wish to increase your savings in sync with that, you would either start a fresh SIP with the extra amount or close the existing SIP and start a fresh one with an increased amount.

The top-up or step-up SIP feature allows an investor to increase SIP instalments by a fixed amount at pre-defined intervals. It provides ease of execution and reduces the time and involvement of the investor.

For instance, if you start an SIP of Rs 5,000 for three years and choose a top-up facility with Rs 500 at half-yearly intervals, your SIP amount will keep increasing by Rs 500 every six months. By the end of the third year, your SIP amount will be Rs 8,000. Some funds offer you to choose a percentage increase such as 5 per cent, 10 per cent and so on either on an annual basis or half yearly basis.

How Top-Up SIPs Can Benefit Investors

Top-up SIPs are beneficial in many ways. First, they give you the flexibility to increase the SIP amount at pre-determined intervals by a certain per cent or amount without making any additional effort.

Second, they help you accumulate more wealth and reach your financial goal faster.

Let us understand this through an example.

Suppose two friends Kavita and Kaveri start an SIP of Rs 10,000 for 20 years. While Kavita chooses the top-up SIP option with a 10 per cent annual increase, Kaveri sticks to the regular SIP. If both the investments grow at the same rate of 12 per cent, Kavita would accumulate twice the wealth than Kaveri. In order to reach the same number as Kavita has in 20 years, Kaveri will have to invest for six more years. To give you some perspective, let us assume if you want to accumulate Rs 2 crore for any financial goal, a with top-up SIP, you can achieve the goal in 20 years, whereas with a normal SIP, you can reach the goal in 26 years, assuming the returns remain the same.

 

Kavita

Kaveri

Amount (Rs)

10,000

10,000

Tenure (Years)

20

20

Expected Growth (%)

12

12

Annual Step Up (%)

10

0

Final Amount (Rs)

1,98,88,715

99,91,479

Difference (Rs)

98,97,236

 

Calculator Source: ICICI Prudential MF

Things To Remember

While top-up SIPs can help build discipline, in terms of increasing your savings as your salary increases, they should be chosen with care.

Remember that most fund houses don’t allow you to modify the top-up amounts once you sign up. If you want to modify the mandate or amount, you will have to cancel the existing SIP and start a fresh one.

It is also important to take into consideration the potential increase in salary or income you expect going forward for a long period.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.Please note that Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. I-Sec does not assure that the fund's objective will be achieved. Please note. NAV of the schemes may go up or down depending upon the factors and forces affecting the securities markets. Information mentioned herein is not necessarily indicative of future results and may not necessarily provide a basis for comparison with other investments. Investors should consult their financial advisers if in doubt about whether the product is suitable for them.The non-broking products / services like Mutual Funds etc. would not have access to Exchange investor redressal or Arbitration mechanism.

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