What are Top-Up SIPs?

“Do not save what is left after spending, but spend what is left after saving.” – Warren Buffett

Buffett’s words of wisdom are truly being followed in this era. A lot of retail investors have inculcated the habit of saving through the Systematic Investment Plan. The picture is clear as the recent numbers show that there are currently 7.13 crore SIP accounts through which investors invest regularly in Indian Mutual Fund Schemes. This data is as of September 30, 2023. While the monthly collections through SIP have also crossed the Rs 16,000 crore mark.

When it comes to investing in mutual funds, investors have two options to choose from lumpsum investment to SIP. While the former allows you to invest all at once, the latter allows you to invest small amounts in a disciplined manner thus reducing the impact of market volatility.

Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a disciplined investment approach in which an individual invests a fixed amount of money at regular intervals, usually monthly, into a mutual fund of choice. It is similar to a recurring deposit where one deposits a fixed amount every month. Here, a predefined amount gets debited from the investor’s chosen bank account as per the standing instructions. One can invest through SIP in mutual funds for mid to long term depending upon one’s financial goal and risk appetite. Most people relate SIP to only equity funds which is a clear misconception. One can also prefer low-risk options for short-term investments such as money market instruments or debt funds or, even opt for Hybrid funds such as Hybrid equity funds or Balanced Advantage funds for medium-term investment. While for long-term investments, the most preferred approach is investing in equity funds.

The most common type of SIP is a Regular SIP. In addition to this, there are other variants of SIP such as Top-Up SIP (where one can increase SIP installments incrementally), Flexi SIP, Trigger SIP and Perpetual SIP. Now, let us explore the benefits of SIP.

Top Six Benefits of SIP:

1. Compounded Returns: One starts earning returns on the amount one invests through SIP. These returns further get reinvested in the original corpus. And this creates a compounding effect. This leads to exponential growth of money over time. The phenomenon is referred to as the Power of Compounding.

2. Rupee Cost Averaging: Every mutual fund unit has an associated Net Asset Value (NAV) that fluctuates on a daily basis depending on the market movement. With SIPs, one buys more units when the NAV is low and lesser units when the NAV is high. This leads to the accumulation of a number of units purchased at varying prices which averages the overall cost of purchasing the units. This concept is referred to as Rupee cost Averaging. This is one of the top benefits of SIP that protects one from short-term market fluctuations.

3. Flexibility of Investment: The best part about investing through SIP is that it is a highly affordable and flexible option for investment. One can invest in SIP with as low as Rs. 100. One can even choose the SIP amount as per one’s income level, financial goal and tenure of investment. Additionally, SIP also gives one the flexibility to increase the monthly SIP investment with rise in income levels. This specific feature is called Top Up or Step Up SIP.

4. No need to time the market: SIP is a disciplined approach to systematic investing. Thus, the manager is not actively involved in timing the market.

5. Investment Discipline: Once a SIP is initiated and KYC (Know Your Customer) and NACH (National Automated Clearing House) mandates are given, it enables automatic deductions from the chosen account of the investor at the frequency specified. This helps in inculcating a habit of disciplined investing. This discipline of investing also helps an investor to stay invested for a longer duration leading to substantial wealth creation.

6. Achieve Financial goals with ease: It is advisable for investors to have a goal-based approach while investing through SIP. One can also have a target price in mind and set up the SIP amount accordingly to achieve the specific financial goal. For this, one can use the SIP calculator offered by fund houses and other financial institutions. One can either have a short-term goal such as a vacation or a long-term goal such as buying a dream home. Or, one can also use the funds to plan for retirement.

Conclusion

Investing in mutual funds via SIP comes with varied benefits for the investors. However, people have many myths regarding this particular mode of investment. Most people assume SIP to be meant only for equity funds which is not true. One can invest through SIP in any mutual fund scheme – be it equity, debt, gold or even an international fund. Generally, it is recommended to that people should invest through SIP for a longer duration (minimum 5 years). They should stay invested to achieve the desired results. Alternatively, one can also withdraw the money invested through SIP in case of an emergency, based on the applicable NAV and exit load. Apart from disciplined investing and flexibility of investment, people also get add-on variants of SIP such as a Systematic Transfer Plan (STP). This allows one to seamlessly switch from one mutual fund scheme to another. There is also Systematic Withdrawal Plan (SWP) that allows one to withdraw a fixed amount from one’s own corpus at a predefined frequency.