SIPs or Systematic Investment Plans have a lot to offer to investors. Right from ease of investing to rupee cost averaging to lighter on the pockets to inculcating financial discipline among investors, to allowing investors to enjoy the benefits of the power of compounding; the list goes on and on. However, one of the major drawbacks of regular or vanilla SIP is that they invest a fixed amount for the entire investment duration. Investors who are enriched with an extra source of income or bonuses or incremental salary might not be able to tap the maximum potential of SIPs with vanilla SIP. However, there is a solution to that as well – top-up SIP. Let’s understand what top-up SIPs are and how they can help to step up your SIP game.
What is top-up SIP?
Top-up SIP, also known as step-up SIP, is a type of SIP where in you can increase your SIP investment by a fixed number or percentage at regular intervals. Usually, investors receive bonuses or increment in their salaries on a yearly basis. Hence, the most common periodicity of step-up SIPs is on a yearly basis. The basic idea behind step-up SIP investments is that as an investor’s income cash flow increases over time, so should their SIP investments. There are two ways you can increase or amp-up your SIP investments.
Method 1 – Increasing your SIP investments by a fixed number
Under this method, your SIP investments are increased on a fixed rupee basis. For instance, let’s assume you begin to invest in SIP with Rs 5,000 each year and decide to amp-up your investment amount by Rs 2,000 every year. Then, next year your SIP investment amount would be Rs 7,000 (Rs 5,000 + Rs 2,000) and the subsequent year investment amount would be Rs 9,000 (Rs 7,000 + Rs 2,000) and so on.
Method 2 – Increasing your SIP investments by a fixed number
This is a more common approach used by investors. Under this mode, your SIP investments are increased by a fixed percentage at regular intervals. For instance, let’s assume you begin to invest in SIP with Rs 5,000 each year and decide to amp-up your investments by 10% every year. Then, next year your SIP investment amount would be Rs 5,500 (Rs 5,000 + 10% of Rs 5,000). Similarly, the subsequent year investment amount would be Rs 6,050 and so on.
How can step-up SIP help to step-up your SIPs?
Following are some of the reasons why step-up SIPs could be extremely beneficial to your investment portfolio:
- Step-up SIPs can significantly reduce your investment horizon as compared to regular SIPs. This is because, SIP investment amount and investment duration have an inverse relation. So, if you increase your SIP investment amount regularly on a periodic basis, your investment horizon would come down allowing you to achieve your financial goals quickly.
- It ensures that you invest a particular part of your income even when you are earning a substantial amount. This inculcates investment discipline among investors.
- The basic principle behind wealth generation is to either increase or keep a constant ratio of savings vs income cash flows. Step-up SIPs run behind this idea.
Several fund houses and investment portals allow investors to amp-up their investment amount with the help of step-up SIPs. So, what are you waiting for? Amp up your style of investing and invest in mutual funds through step-up SIP. Happy investing!