4 Things to Consider Before Choosing SIP Top-Up

An SIP top-up facility can be a convenient and easy way to boost your investment strategy. It allows you to increase your SIP instalments by a fixed rate every year.

Despite its many advantages, there are some factors that investors should consider before opting for this facility. This article tells you more about SIP top-ups and how to decide if they are the right investment strategy for you.

• Table of contents

1. What is SIP top-up?
2. Things to keep in mind before choosing SIP top-up

What is SIP top-up?

When you invest in an equity or debt mutual fund via SIP, you put in a fixed amount at pre-set intervals into the scheme of your choice. You can decide how much to invest and at what frequency (monthly, weekly etc).

A top-up SIP allows you to increase your SIP investments by a fixed percentage at regular intervals – typically annually. For instance, you can choose a top-up of 10%. So, if you start your SIP at Rs 500, the amount in the subsequent year will be Rs 550, and the year after that, it would be approximately Rs 605, and so on.

This facility enables you to increase your investments every year on autopilot. With the power of compounding, even these small increments can potentially increase your final corpus by a significant amount. This can also help you potentially mitigate the impact of inflation on your investments.

To understand the potential effect of SIP top-ups on your investments, you can use an SIP top-up calculator and an SIP calculator to compare the difference in the potential returns of the two investment approaches. These tools can help illustrate how regular increases in your SIP amounts can influence your overall investment growth when compared to a static SIP amount.

Things to keep in mind

Despite its many advantages, the SIP top-up facility should be chosen after considering the following factors:

• What rate of increase you should choose: Before committing to a top-up SIP, asses if your income is likely to increase every year and by how much. You should also ensure that you have adequate emergency funds even if you allot your increased income to your SIP plans. Other important expenses and liabilities such as loan repayments should also not be affected. An SIP calculator with step up can help you do the maths and determine what top-up frequency would work for you.
• Which fund to choose: If you are investing in multiple schemes, you should evaluate which one (or ones) is suited for a top-up option. This would depend on multiple factors, including what goal each fund is catering to and which time horizon would be best for a top-up plan. For instance, a long-term equity investment with the potential for capital appreciation may yield better potential results with a top-up than a short-term debt fund. Take the guidance of a financial advisor, if possible, to make this decision.
• Whether you want to use the money for a different scheme or investment avenue: You may want to use your increased income on a new or different kind of investment instead of stepping up existing SIPs. A cost-benefit analysis with the help of a financial expert can help you make this call.
• Life events: An increase in your income may be accompanied by a change in your life circumstances that may also increase your expenses. If an investor is planning to have a child, for example, the resultant increase in monthly expenses may make it difficult to maintain a top-up plan.

Considering all these factors before committing to an annual increase in your SIPs will help you make a more informed decision and make your investing journey smoother.

Conclusion

An SIP top-up plan can be a convenient way to automatically increase your investments to keep pace with inflation and rising incomes. Small increments can also potentially have a significant impact on your final corpus. However, before choosing this facility, it is important to consider whether it fits into your overall investment strategy and is suitable for your annual expenses.

FAQs

What are the advantages of SIP top-up?

An SIP top-up can be a convenient way to strategically increase your investments at regular intervals. With the power of compounding, these small increments can potentially have a sizeable impact on your final corpus. Since this process happens automatically, it saves you the time and trouble of evaluating your SIP amounts every year and deciding whether to increase them and by how much. This could also increase the chances of you adhering to a disciplined and effective SIP strategy that can potentially keep pace with rising income levels and inflation.

What are the disadvantages of SIP top-up?

The facility makes you commit to a regular increase at a fixed interval. This could potentially be a disadvantage if your expenses rise in proportion to your annual salary increment, or if the increment is higher than the top-up rate. It is also important to select the right type of scheme for such a strategy, depending on your investment horizon, goal amount and what you need the money for.

What is an SIP top-up calculator?

An SIP top-up calculator is an online tool that allows investors to see the potential impact of regular increments to their SIP amounts on their final corpus. You will need to enter your starting SIP amount, top-up percentage, investment horizon and expected rate of return. The calculator will show you the size of your potential corpus with and without the SIP top-up facility. Do note that these calculations assume a fixed and stable rate of return. The actual return on your investment will depend on market conditions and may fluctuate during your investment period.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.