Systematic Investment Plan a.k.a SIP is a great way to create a habit of investing in mutual funds. An extension of the SIP is a top-up facility. In simple worlds, SIP is a process of investing a fixed amount at a fixed interval (say a month) in mutual funds. Top-up allows you to increase the SIP amount at a fixed interval (generally half-yearly or yearly). For example, a SIP of Rs. 5000 per month with a 10% top-up means you will invest Rs. 5,000 per month for the first year, Rs. 5,500 per month for the second year and so on.
ADVANTAGES OF SIP TOP-UP
1. Automatic increase in investment with salary increases
Consider you started a SIP at the beginning of your career. Now, as time progresses your salary increases every year but you are investing the same amount every year because of fixed SIP or you start new SIPs every year. SIP top-up helps you automate the process by increasing your SIP amount.
2. Achieving financial goals faster
As you are increasing your investment with time, the corpus is expected to increase faster. So, it is expected to take less time to achieve your financial goals.
As inflation erodes the value of money (purchasing power), it may be a good idea to increase the SIP with the expected inflation. This makes sure that the purchasing power of the corpus is preserved.
HOW MUCH DIFFERENCE TOP-UP CAN MAKE?
Let us consider we started a SIP of Rs. 10,000 every month and interested in investing for 20 years. If we consider that the average expected annual growth rate (CAGR) of the investment is 12%, the corpus at the end of 20 years is expected to be around Rs. 92 Lacs. Now, what would happen if we opt for a 5% annual top-up? The expected corpus would be around Rs. 1.28 crore – i.e. around 39% higher. What would happen if we opt for a 10% annual top-up? The expected corpus would be around Rs. 1.86 crores – more than twice the without top-up corpus.
We can see how significant difference mere 5% and 10% can make.
Be the first to like8 Shares10:46:37 AM, 25th January, 2019