Systematic Investment Plans (SIPs) offered by mutual funds need no introduction. They are quite popular among retail investors - a convenient way to invest regularly. But often, inertia sets in and SIPs do not mirror the rise in income. The industry's new feature Top-up takes care of just that.
What is SIP Top-up?
SIP top up top-up allows investors to increase their installments by a fixed amount at pre-determined intervals. Most mutual funds offer the facility to automatically increase SIP amount in multiples of Rs. 500 quarterly, half yearly and annually. Investors have the option to discontinue the facility by mentioning the maximum limit of SIP amount or the period.
To better understand how the process work in the SIP top-up feature and how different it is from regular SIP, let's look at a hypothetical case study.
Rahul and Ajay start monthly SIP in a mutual fund. Rahul chooses regular SIP, while Ajay opts for SIP top-up wherein his SIP amount will increase by Rs. 1,000 on a yearly basis for the next five years. At the end of the sixth year, Ajay increased his investments on an incremental basis (Table 1) to total of Rs. 2.52 lakh compared with Rahul's Rs. 72,000.
To reiterate, increasing one's regular investments in sync with rise in income is a prudent strategy to achieve financial goals. Mutual fund investors should use the top-up facility to reach financial goals.
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