All you need to know about SIP top-ups
Financial experts always recommend that revising financial goals, shifting asset allocation and reviewing your investment strategies at regular intervals is imperative for building wealth. Taking stock of your portfolio and your financial plans is not only warranted when there is an emergence of a new goal on the horizon or due to a shift in financial liabilities owing to a change in circumstances. Frequent evaluations are also recommended because of changes in your income - if you are saving and investing the same amount that you used to set aside five years ago despite your salary having increased by leaps and bounds, you are denying yourself a chance to earn significantly higher returns.
Gone are the days when the term ‘top up” would be synonymous only with mobile recharge vouchers. These days, top-ups are available for all kinds of services under the sun. Mutual fund schemes have also joined the bandwagon and now you have the option to top-up your SIP investments according to your investment capabilities.
How do SIP top ups work?
If you have enrolled for SIP, the SIP top-up facility allows you to increase the SIP installment by a fixed amount after a certain period. You can bum-up your monthly contribution either by a percentage of the ongoing SIP or multiples of a minimum amount as specified by the mutual fund scheme. With conventional SIPs, the option to increase contributions is generally absent and investors usually have to make lump sum investments or start fresh SIPs should they wish to increase their investments. SIPs that afford investors the flexibility of top ups are knows as step-up SIPs.
With these SIPs, you can specify the upper of the top-up either in terms of the amount or a date. For instance, if you invest ₹15,000 every month in an SIP and wish to add ₹5,000 every month at the end of each financial year or every six months, you can use the top-up facility. The SIP top up will be stopped either when the amount cap has been reached or the date specified has passed. However, you can continue investing in the SIP with the investments at the capped level.
Deepak Chhabria, CEO of Axiom Financial Services says, “The objective of SIPs is to inculcate in investors the habit of regular investing which can mitigate risk of erosion of value by sudden market corrections. The basis of the SIP mechanism is what we call ‘rupee cost averaging’: regular and monthly investment ensures that investors participate in market corrections, without any intervention or attempt on their part at timing the market.”
“Now during a sustained bull run and market rally, the likes of which we are witnessing today, averaging on uptick leads to higher acquisition cost. Also, for long term SIPs, if the same amount continues, it may not keep pace with rising inflation and additional investments through SIPs or lump sums may be required. The SIP top up facility can come in handy during these situations for bridging the gap,” Chhabria explains.
Why you should use the SIP top up facility?
The amount you can save and invest is a function of your income. This is why early career days for most people are marked by lower investment volumes and as one climbs the career ladder, their ability to save and invest increases significantly.
As your income increases every passing year, either in the form of increment or an annual bonus, the top up facility can be a good way to keep your investments growing. Top-ups allow you to increase your SIP amount over a period of time and as such, you end up investing more. This also gives you greater room to buy more mutual fund units at varying price units.
Here is an example. Let’s say you have a monthly SIP for your child’s wedding for ₹5,000 for 20 years with a return of 12 percent per annum. The amount you would accumulate at the end of two decades would be approximately ₹50 lakhs. Now consider a situation where you can top-up the SIP by ₹500 every six months, you would have accumulated ₹1.1 crore at the end of 20 years – almost double the capital that would have been generated without the top up facility.
Similarly, if you are investing through SIPs for retirement, over a period of time you may realize that the corpus you had initially anticipated for retirement may not be enough. SIP top ups can help you achieve the enhanced corpus within the same time frame. For instance, a corpus of ₹5 crore, can be built in 20 years with monthly SIPs of ₹22,112 with a 14 percent rate of return and by increasing the annual top ups by 10 percent every year. Without the top-up- facility it would take you five more years to accumulate the same amount.
The above example also shows that top-ups can be a great way to make your investments stay ahead of inflation. It is common knowledge that inflation dampens the purchasing power of your money and for your investments to shield you from its pinches; the returns should be higher than the inflation rates. By raising your SIP contributions through top-ups, you will be able to keep pace with galloping inflation better. Top ups are also a better way to augment your investments as compared to the lump sum route because you with SIPs you will be able to spread out you investments and have the chance to enter the market at different cycles. On the other hand, making a lump sum investment may require you to analyse the market conditions first and you may even have to wait for a better time before investing.
SIP top-ups are also a more efficient way to ramp up investments than starting new SIPs. You are spared of the trouble of having to manage multiple SIPs and neither do you have to rack your brains over a new investment opportunity.
• You need to be confident that you will be able to consistently invest higher amounts for a fixed period before signing up for a top-up.
• Review the performance of the mutual fund before opting for a top-up. It would be unwise to increase contributions in a mutual fund scheme which hasn’t been performing well and whose prospects are dull.
• Once you have enrolled for a SIP top-up details, you cannot change it. You will have to cancel your existing SIP and opt for a new SIP which has a top-up facility.
Disclaimer: This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.