Finance

Understanding Top-Up SIP and its benefits

 We all are aware of the most common way of investing for retail investors, i.e., SIP.

What is SIP ?

A SIP (Systematic Investment Plan) helps an investor to invest in a small and fixed amount at a regular interval (daily, monthly, quarterly, etc.). SIP is a great way to remain disciplined concerning your investment. By contributing a fixed amount every month, an individual tends to accumulate wealth over the long term.

What is step-up SIP?

In step-up SIP, an investor gets the flexibility of topping up his existing SIP or allows for a new SIP. This is because an investor’s income tends to go up.

An investor can always use his surplus to start a new SIP or top-up (increase the amount) of the existing SIP. Some mutual funds provide a top-up facility. In this mode, an investor can increase the amount of SIP installment by a fixed amount at a defined interval. The option offers flexibility to an investor to save more and reach his/her objective faster.

Conditions under which top-up SIP can be used?

Top-up SIP can be made only in the multiple of a specific top-up denomination such as Rs 500. The facility of top-up SIP can be availed by using any of the payment top-ups can be made only in multiples of specific denominations (e.g., Rs. 500). The facility can be availed through direct debit or ECS mandate mode.

How does the investor opt for the facility?

There is a specific form that is available for availing the top-up facility. The forms are available for download on the website of the fund house or even with the third-party platforms such as Orowealth.

Which details are used for subscribing to top-up SIP?

The information used is basic details of the investor such as name, folio, existing SIP scheme details, SIP amount, SIP frequency, and the likes. Also, top-up amount, top-up frequency, etc. should be mentioned in the form.

Also, it is essential to note that all the unit holders should sign the form in case the mode of holding of the units is “joint.” Some of the fund houses require the bank mandate to be provided along with the SIP top-up form.

Whom should the investor submit the form?

An investor should submit the duly filled form at the fund house office or the investor service center as designated by the AMC, including the offices of third party platforms.

How much time does it take to process the top-up SIP?

Once the SIP top-up form is submitted, it generally takes 30 days to process and activate the top-up.

Points to note

An investor is required to keep a note of the following two points while opting for step-up SIP –

  • A separate top-up form is needed to be filled for each registered SIP
  • A time gap is required to be maintained as specified by the AMC must be maintained between two consecutive top-up requests. The difference is typically 3-6 months.

Now that you know what is SIP and Top –up SIP, below are the advantages

Advantages of top-up SIP

 Adapts to rising income

Every individual goes through increasing income (salary) every year. Employers provide annual increment and bonus. This amount can be invested in creating wealth. The incremental amount can be invested as a top-up to an existing SIP.

Helps to achieve the goal in a faster manner

SIPs are designed to help an investor achieve his/her long-term financial objective. The top-up facility helps to reach financial objectives faster as compared to regular SIP as an investor can then save a higher amount every year due to a higher surplus.

Helps against inflation – Investors choose to increase their contributions to ensure they overcome inflation by generating enough wealth. Inflation (the rate at which the price of products increase) tends to erode the value of money, and it is thus imperative that an investor would raise the contribution to fund his/her objective over the long-term.

Provides flexibility to invest in an existing plan rather than an opening a new one

Top-up SIP facility enables an investor to save the hassle of managing multiple SIPs. A rise in income or an unexpected cash inflow always compel an investor to save thereby leading to a requirement of systematic investment. While looking for a new investment avenue may be time-consuming, topping up on the existing is more comfortable, faster, and the investor is aware of the real performance; thereby, it is more efficient.

Let us see an example,

Mr. A wants to save money for a farmhouse, which he intends to buy in 20 years. He was advised to start a SIP in a mutual fund that invests in equities. By investing Rs 5000 per month, Mr. A seeks to reach Rs 45 Lakh corpus generating a return of around 12% per annum.

Now, assume Mr. A gets an increment of 10% in his office every year, and he decides to increase his SIP contribution by 10% every year. In this case, Mr. A can attain his goal of Rs 45 Lakhs in less than 16 years. This means his goal of Rs 45 lakhs is achieved four years faster in the top-up SIP than the regular SIP.

Conclusion

To conclude, we can say that a top-up facility lets an investor accelerate his speed towards his goal. Also, the SIP top-up helps investor strike a balance between discipline and flexibility as top-up SIPs are a disciplined approach to investing and also provides the flexibility of increasing monthly contribution.

Lastly, top-up SIP is a great way to achieve goals faster as investor tends to save more with rising income levels over time.

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