Is Top-Up SIP Necessary For Wealth Creation?
Systematic Investment Planning (SIPs) are becoming a top choice for regular investors as you can start investing in mutual funds with as little as INR 100 - INR 500. The growing popularity of SIPs is evident from increasing SIP contributions, which crossed INR 24 crore mark in September 2024, recording a 4% increase in a month1. SIPs allow you to invest regularly and generate wealth through compounding and rupee cost averaging. What if you could take SIP to the next level with regular monthly investments? Top-up SIP or step-up SIP does just that! You can increase SIP contributions periodically and boost wealth. Let's understand top - up SIPs in detail.
What Is SIP?
You can invest in mutual funds as a one-time lumpsum investment or regularly with a systematic investment plan, more commonly known as SIP. Through SIP, you invest a fixed sum of money periodically (monthly, quarterly, or annually) in a mutual fund scheme of your choice for a chosen investment period. You can do SIP in fixed income opportunities like corporate bonds as well. This facility is available on Grip Invest.
You can set up auto deductions so that you never miss SIP contributions. The consistent investments build a considerable corpus, making SIPs a desirable investment proposition for long-term financial planning. To build a desired corpus, you can use a SIP calculator to determine the amount of money you need to invest monthly.
What is Top-Up SIP?
While SIP is an intelligent way of investing, contributing the same fixed amount year after year would not always add to maximum wealth creation. A step-up SIP is an upgraded variant of the standard SIP. It offers the facility to increase your contribution amount annually.
Depending on the chosen scheme, this can be a percentage of the current year's SIP amount like 5% or 10% every year, or a fixed increase to SIP every year like INR 1,000 or INR 5,000 every year. You must select this top up option when opting for top-up SIP. Using a top-up SIP calculator, you can estimate how much your corpus will grow at the end of the investment period.
Understanding Regular SIP vs Top-Up SIP With An Example
Let us break down both strategies with examples to truly understand the impact of a regular SIP versus a top-up SIP.
Consider Rajesh and Mahesh, who opt for regular SIP and top-up SIP, respectively. They both start with INR 10,000 to build their retirement corpus in 20 years. Let us assume that both of them have the same job profile with the same increase in income and invest in the same scheme with an average 12% return. Here is how their investment works for them:
Rajesh – Regular SIP
Parameter | Regular SIP |
SIP Amount | INR 10,000 |
Expected Return per Year | 12% |
Annual step - up | n/a |
Investment Duration | 20 years |
Total Investment | INR 24,00,000 |
Earnings | INR 75,91,479 |
Total Value | INR 99,91,479 |
Mahesh – Top Up SIP
Parameter | Top-Up SIP |
SIP Amount | INR 10,000 |
Expected Return per Year | 12% |
Annual step - up | 10% |
Investment Duration | 20 years |
Total Investment | INR 68,73,000 |
Earnings | INR 1,30,15,716 |
Total Value | INR 1,98,88,715 |
Mahesh could almost double the retirement corpus compared to Rajesh by choosing the top-up SIP option. Mahesh's ability to increase SIP amounts with each passing year ensures he invests in larger sums as the income grows, thus amplifying the compounding effect.
Advantages And Disadvantages Of Top-Up SIP
Top-up SIPs make investing more flexible and efficient by automating the increase in investment over time. Although top-up SIPs have innumerable benefits, not everyone can avail of them. Always consider other disadvantages before investing in the scheme. Here is a table that summarises the advantages and disadvantages of top-up SIPs:
Pros | Cons |
The SIP contribution increases automatically by a predetermined sum, typically once a year, without manual intervention. | Increased contributions may become a burden if you experience income loss or unexpected large expenses. |
Helps protect against inflation by steadily increasing contributions, ensuring your investments outpace rising costs. | Increased investments in volatile markets can lead to higher risks during downturns, affecting returns. |
Adjusts your contributions in line with wage increases or additional income, ensuring investments grow as your income does. | Incremental increases may not take advantage of market conditions that are more favourable for lump sum investments. Also, limits opportunities to explore other SIPs or investments. |
Instead of managing multiple SIPs, top-up SIPs allow easy management with automatic increments, reducing the need for constant monitoring. | Once set, the top-up amount and frequency can be difficult to adjust later. |
Things To Keep In Mind Before Starting A Step-Up SIP Investment
Investing through a step-up SIP can undoubtedly generate more long-term wealth, but any investment decision must be cautiously made. Consider these points while you are initiating your step-up SIP investment:
1. Evaluate Your Financial Capacity: Before selecting a step-up SIP, know about your finances and if it would be possible for you to bear the increment investments in the future.
2. Choose A Practical Amount: You should pick an increment which is within your budget and the growth of your income without overburdening your finances. A slight increase is more efficient than a significant top-up, which you find difficult to sustain.
3. Plans For Long-Term Investments: You can use Step-Up SIPs for long-term goals like retirement or children's education. Ensure that the frequency of step-ups and contribution amounts align with how you would want to follow the timeline of your financial objectives.
4. Understand Market Risk: Market conditions can change, and the returns on your investments can go up or down.
5. SIP Performance Monitoring: It is essential to periodically review the performance of the mutual funds you invest in. You may need to adjust if your chosen funds are not performing as expected or your financial goals change.
6. Be Prepared for Long-Term Commitment: Be sure that your financial situation is well established to sustain these increased contributions for years to come, and early withdrawals or changes might affect your plans for building wealth.
7. Understand How Top-Up SIPs Work: Some SIP schemes have specific rules regarding the top-up process, including limits on the frequency and amount of top-ups. So, it is essential to understand the terms before committing to avoid any unexpected restrictions later on. You can use the SIP top-up calculator to know how much you must commit to the investment from a financial perspective.
Conclusion
Top-up SIPs allow for a better and more effective way of growing wealth over time. They can start with small amounts, gradually increasing as your income improves. Increasing your investments gradually will help you save more and ensure that your investments can beat inflation. The flexibility and ease through automatic increments make top-up SIPs attractive for retail investors. Remember, it is a long-term commitment, and thoroughly understand your future needs before investing. To learn more about investment strategies and portfolio diversification, sign up on Grip Invest today.
Frequently Asked Questions About Top-Up SIPs
1. What is the difference between SIP and top-up SIP?
In a regular SIP, investors contribute a fixed amount regularly, which remains unchanged. On the other hand, a top-up SIP allows investors to increase their contribution at fixed intervals (typically annually), which helps adjust to income growth and inflation, thereby enhancing wealth creation over the long term.
2. Can we top-up an existing SIP?
Yes, you can opt for a top-up SIP for an existing SIP. However, selecting the top-up option while enrolling in the SIP is essential. Once the SIP is set up, you cannot alter the top-up details unless you make changes in the system through the mutual fund provider.
3. What is the maximum top-up amount in SIP?
The maximum top-up amount in a top-up SIP depends on the mutual fund's policies, but typically, it is capped at a percentage of the initial SIP amount (e.g., 10%, 15%, or 20%). The exact limit can vary based on the investment provider and the investor's preferences.
References:
1. The Economic Times, Accessed from, https://economictimes.indiatimes.com/mf/mf-news/sept-amfi-data-monthly-mf-sip-contribution-tops-rs-24000-crore-mark-for-the-1st-time/articleshow/114117185.cms?from=mdr
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