SIP has turned out to be the most in vogue and highly effective means of investment in mutual funds.
The reason for the same lies in its simplicity, flexibility, and generation of very high returns in a certain span of time.
While the very basic principle of SIP is that of investing a fixed amount at regular intervals, investors generally tend to miss a major feature that would help them speed up realization of their financial goals-that of top-ups.
We will discuss in this article how SIP top-up can make your savings and investment more productive for reaching financial goals in the most efficient way and why it needs to be part of the overall investment strategy.
We’ll also look into whether starting an SIP with a minimum amount like Rs. 500 per month makes sense and should be gradually increased.
What is SIP Top-up?
SIP top-up facility allows the investors to increase their SIP every month with a step-up nature based upon a certain percentage or amount over time.
Now, for instance, you are starting with a SIP of Rs 5,000 per month. You may opt for 10% annual top-up on it.
That will raise your SIP contribution to Rs 500 every year and help your investment gain at a faster pace.
SIP top-ups would be very useful for all those investors who would like to capitalize on the increasing income levels or financial development.
It would be of great use for those people with long-term goals like retirement planning, children’s education, or home buying.
Why Top Up SIP?
Here are the most important reasons you should top up your SIP:
1. Inflation Mitigation
The greatest concern with which one grapples prior to planning the long-term saving is inflation.
since the purchasing power of money has a tendency to decay with the passage of time on account of the rising rates of inflation.
Example: The price that one may pay Rs 1,00,000 currently would cost the amount of Rs 2,00,000 after 15 years.
While topping up an SIP thereby increases the increment in investment into the SIP,
compensation for that inflationary phenomenon happens as there’s a compounding effect seen within the rising value of that investment.
SIP top-ups work as a simplistic mechanism through which you can keep increasing your investments month by month,
and they help you catch up with the financial objectives in accordance with future inflationary expectations.
2. Increasing Income or Affordability
People typically start off by investing a few hundred or thousands of rupees into their investments;
mainly because they are not making too much money, and this investment amount keeps going up as the person’s income increases over the course of time.
SIP top-ups will thus be of assistance here.
You start with a SIP of Rs. 500 per month,
and when you observe an increase in income,
you can top up your SIP to Rs. 1,000, Rs. 2,000,
or any amount you are comfortable with. Incremental increase over time ensures
that your investment grows at a pace suited to your financial aspirations.
3. Compounding Benefits
By any measure, the best tool to achieve wealth building in the long run is the power of compounding.
The more one invests, the more their investments grow, and so on-the list of returns.
Thus, if you add money to your SIP, it enhances the corpus amount that gets a chance to gain through compounding.
The more you top up your SIP contributions, the earlier you start, and the larger the corpus in the long run.
This increases the acceleration of the wealth-building process.
This is very helpful in achieving long-term financial goals like retirement.
In the case of retirement planning, the sooner you start, the more time your investments will have to grow.
4. Attain Your Financial Goals Sooner
Whether it is your children’s education, a dream vacation, or your retirement;
the top-ups will certainly fasten the time to reap the benefits for achieving financial goals. Periodic increments in SIP contributions effectively turbo-charge an investor’s plan.
For example, if you were saving for your child’s higher education;
which is 10 years from now, you would top up your SIP annually or semi-annually.
This would enable you to meet your goal earlier, while avoiding the risk of a shortage owing to inflation or an unexpected expense.
5. Flexibility to Adjust to Life Events
With the passage of time, your financial scenario will keep changing.
For instance, you may receive a promotion, raise in salary, or some other form of windfall gain.
Top-up SIP allows you to change your investment based on the improvement in your financial situation.
If your expenses go up or even if you sustain some short term loss,
according to the conditions of the provider of SIP you can cut it down or may even stop further top-ups, but ensure that this investment plan can be sustainable as well.
More importantly, there is flexibility about SIP recharges-mostly frequency and amount-investors get to decide.
Thereby, ease in tailoring your SIP towards your current fiscal situation.
6. Discipline and Long-Term Commitment
One of the major benefits of SIP is that it promotes disciplined, long-term investing.
When you select to add on to your SIP, you further strengthen this habit.
Even though you may begin with a minimal amount.
for example, Rs. 500 per month, the gradual rise in contributions inculcates a habit of saving and investing.
This can then become a routine part of your financial life over time, allowing you to always work toward your goals.
Practical Example: Rs. 500 to start with SIP.
Assume you want to save Rs. 25 lakhs for retirement in 20 years.
You start with a SIP of Rs. 500 per month. Now, Rs. 500 may not be too much of a sum, but it is an excellent starting point.
Let’s see how this small initial investment combined with systematic top-up strategies can help one reach the goal.
Assumptions:
Starting SIP: Rs. 500 per month
Annual Top-up: 10%
Investment Time: 20 years
Average annual return through equity mutual fund: 12%
Target Amount: Rs. 25 Lakhs
If you calculate the future value of this SIP, either by an SIP calculator or financial model,
you will be surprised to learn that your SIP will grow. Starting with a basic SIP of Rs. 500
and the top-up is 10% per annum,
based upon the return consistency and the strategy that you evolve for the top-up,
you might be able to achieve Rs. 25 lakhs at the end of 20 years.
This is an example of showing that small beginnings do not necessarily exclude the big goals.
Contributions made periodically increase with time;
hence this allows your investment more time to grow and compound, thus letting you realize financial goals much quicker.
How to increase SIP?
Most mutual fund companies make it easy to increase your SIP either on the website or the mobile applications.
Here’s what to do:
Select your SIP top-up amount
You may opt to enhance your SIP by a fixed sum (say, Rs.1,000) or by a percentage (say, 5-10% per annum).
Decide the Frequency
Normally, SIP top-ups are given once in a year or half-yearly; however, you can decide the frequency at will based on your income or financial conditions.
You can set up the top-up scheme for yourself at the time of registration by most of the mutual fund platforms, or you can change it any time through modification of your present SIP.
Monitor Your SIP Performance
It’s essential to review your SIP regularly to ensure it’s performing well and aligned with your goals. If necessary, adjust your top-up strategy based on changes in your income or financial objectives.
Conclusion
Topping up the SIP is very effective to speed up your wealth-building process so that you meet all your financial goals that much faster.
Starting with Rs 500 or any amount that suits your pocket seems to be just right,
but an enhancement of SIP over time ensures that your investment is also doing the same, growing in the direction aimed for in accordance with financial aspirations.
Remember that the key to successful investment is consistency and how SIP top-ups can be more rewarding,
letting you experience the power of compounding as well as being somewhat immune to the negative effects of inflation.
Regardless of whether retirement or education happens to be on your list, topping up the SIP will only get you to the goal with higher efficiency.
With SIP top-ups, you can be in control of your financial future, enjoying the satisfaction of watching your wealth grow steadily and steadily toward your desired goal.
So don’t wait. Start small, increase regularly, and build wealth for a brighter financial future!
Summary:
Replenishing your SIP is one of the most effective strategies to accelerate the realization of your financial goals.
This way, an investor can increase the amount of investment every month periodically, often with a fixed percentage or amount that helps him enhance the compounding benefits and keeps the erosion by inflation to its minimum.
It can be initiated with as small a sum as Rs 500. The more he earns, the more he contributes to his SIP. You will still be on track to meet your goals.
It is a great way to create a disciplined approach to long-term investing and build up investment faster.
SIP top-ups help you cope with the fluctuation of finances in life and have the liberty to adjust the contribution amount at any time.
Frequently asked Question
1) What is an SIP top-up?
An SIP top-up is the facility of enhancing your monthly SIP contribution by a fixed amount or percentage to get closer to achieving your financial objectives sooner.
2) How can SIP top-ups help with inflation?
As little as Rs. 500 per month is enough to initiate an SIP and then gradually enhance it through SIP top-ups once your financial scenario improves.
3) Can I start with a small amount like Rs. 500?
Ideally, they must be performed yearly or during other periods in life when the incomes rise, and you wish your financial targets had more stimulus.
4) When should I top up my SIP?
Well, the SIP can have top-ups made to the amounts or increases with frequencies decided as per an investor’s income profile.
5) Are SIP top-ups flexible?
Yes, SIP top-ups are flexible, and it is up to you to select the amount as well as frequency of increase that suits your wallet.