Mutual fund investors can buy fund units in a lump sum or through an SIP. A Systematic Investment Plan is where you invest a fixed amount in predetermined funds regularly. The regularity can be daily, weekly, monthly quarterly etc. The regular investment amount gets auto-deducted from your bank account.
SIP instils a saving discipline by bringing regularity to the investment. You can also increase the amount of investment as and when you deem necessary. This increase in SIP instalment is known as SIP top-up.
SIP top-up is beneficial for a few very important reasons.
Firstly, it helps you fight inflation. Inflation reduces the purchasing power of money. If you are saving the same amount each month for the last 20 years, chances are that that amount holds little value now, compared to two decades ago. With a SIP top-up, you can ensure that your savings regularly increases a step or two more than the inflation rate.
Secondly, a SIP top-up ensures that you invest as per your income level. The income of a salaried person, and most entrepreneurs, is likely to grow with each passing year. Increased income denotes that you are now capable of investing more out of your income. With a SIP top-up, you can auto step-up your mutual fund investment after a pre-defined interval.
Thirdly, it is a given that your mutual fund corpus will increase sooner if you increase your instalments more often. Mutual fund investments are made with a financial goal in mind. For example, you would like to see X amount getting accumulated out of your SIP in, letʼs say, 20 years. Sometimes, the market situation may slow down this financial growth, as applicable in periods of a prolonged recession. Through SIP top-up you can ensure that you achieve what you set out to achieve with your SIP investment.
It is very easy to activate the top-up option on your SIP. If you want your SIP instalment to increase regularly, the formality of doing so shouldnʼt be a deterrent. Most SIP platforms have the auto-escalation option. If you click on it and choose the percentage or amount of increase, along with the frequency, your SIP investment will top up automatically.
In some cases, the SIP investor may experience a fall in income. This would make an SIP contribution, let alone a top-up, difficult to maintain. Fortunately, you can set a maximum limit on SIP top-up. This will ensure that the escalation in SIP contribution doesnʼt go beyond the set limit. However, the SIP will continue at this maximum level for the duration as set by the investor. Nevertheless, you can cancel the SIP at any time if your current income doesnʼt permit such investments.