New Delhi: Without a doubt, the systematic investment plan (SIP) has emerged as the common man’s chosen vehicle to participate in equity and other assets. However, advisors sometimes recommend that investors should go beyond plain vanilla SIPs and explore the option of top-ups of SIPs.
As the name implies, top-up mode allows an investor to keep increasing the quantum of investment in SIP at a pre-determined frequency. It can be done in two ways – one, by a fixed amount every year, or by a certain percentage of the existing SIP.
Top-up mutual fund SIPs: Brokerage view
Broking house Motilal Oswal says, “SIP top-up cover inflation and funds needs and enable early retirement. Consistently boosting SIPs compounds investments and discounts worries.”
“A SIP top-up is particularly useful for investors whose income is expected to increase overtime or expenses are likely to reduce. It allows them to start with a small investment and gradually increase it,” said Whiteoak Capital Mutual Fund in a recent report. “An investor looking to accumulate a specific corpus for retirement can achieve that target amount much earlier by opting for the SIP Top-up facility and ‘Retire Early’,“ it adds.
Young investors, too, can especially benefit from this approach — Those who have started working and after meeting their monthly expenditure from their salary have a small amount to invest. However, they expect their salary to grow with every passing year.
Grow you wealth
A few years ago a CRISIL report recommended trying out the top-up of SIP because it would create more wealth in a disciplined manner.
“A comparison between a regular SIP and a top-up SIP – assuming a monthly investment of Rs 5,000 in CRISIL-AMFI Equity Fund Performance Index for 15 years to June 2019 shows that a top-up SIP (with a 5 per cent increase in contribution every year) yields Rs 33 lakh, compared with Rs 26 lakh for a regular SIP,” wrote CRISIL in the report. If incomes are rising, SIP contributions can be stepped up periodically which will lead to bigger wealth creation, said the ratings major.
Top-up SIP vs vanilla SIP: Returns compared
Whiteoak Capital Mutual Fund has published results from an observation. It has calculated returns on a monthly SIP of Rs 10,000, on Rs 10,000 + Rs 1,000 annual top up and on Rs 10,000 + 10 per cent annual top-up (which works out to be a variable top-up).
It has calculated that with a fixed SIP of Rs 10,000 the returns (XIRR%) over periods of the past 5 years, 10 years and 15 years are 16.1 per cent, 14.5 per cent and 13.6 per cent, respectively.
In the second mode (SIP of Rs 10,000 + Rs 1,000 annual top-up) the returns (XIRR%) work out to be 17.0 per cent, 14.7 per cent and 13.8 per cent over the past 5 years, 10 years and 15 years, respectively.
In the third instance, (SIP of Rs 10,000 + annual top-up of 10 per cent) the returns (XIRR%) for the past 5 years, 10 years and 15 years were 16.9 per cent, 14.8 per cent and 13.9 per cent, respectively.
The difference in return over long periods and a big base works out to be a tidy sum.
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Mutual fund investment: Who should go for top-ups in SIP? How will it benefit investors? A recent research finds out with data. Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
