As you grow in life your needs and wants also grow. When you get your annual salary increment, the first thought always tends to be about your increased spending and borrowing capacity. With more money comes the added temptation to spend more and upgrade your lifestyle. This is human nature to want more when we have the means. Rarely does one think that with increased income, you can save more too! Almost everyone tends to ignore regular increases in investments and savings in the same proportion as your income growth.

While you may have allocated a fixed amount for investments such as mutual funds via SIPs, it is also important to increase the amount to match the hike in your income. More money in your hands not only means an increase in the ability to spend. It also means the responsibility to save and invest more.

However, it would be an additional task to increase your investments every year manually. The answer to this is the top-up or step-up facility available for SIPs. A SIP top-up allows you to increase the SIP amount at a pre-determined interval. For most fund houses, the interval is half-yearly or annually. The SIP top-up amount can be specified as a fixed amount at the set frequency over the original SIP amount. 

Wealth Creation with Top-Up:

Increasing your mutual fund SIP even by a small amount will help you to make more money in the long run. Let’s see the comparative results for a period of 15 years and an assumed return of 12%. 

As is visible, the wealth created more than doubles for the given horizon. Even small changes in the top-up amounts can lead to significant impacts in longer investment horizons. 

How Top-up SIPs can be helpful to you?

Some of the significant benefits of stepping up your SIP amount or increasing them periodically are as follows:

1. Convenient way to fight inflation: Inflation, or rising prices, erodes the purchasing power of our hard-earned money. A fixed SIP over the years means that you are saving less and less, as the value of money decreases. Further, the amounts that seem substantial to fulfil a financial goal today may not be a few years down the line as your status /living standards improve. Top-up SIP helps you counter inflation and keep you on track to match the impact of inflation on your overall financial plans. It is advisable to raise the SIP contributions equivalent to the inflation rate or more, just to maintain the real value of savings with time. 

2. Achieving bigger and faster goals: Regular growth of SIPs can help you reach your financial goals faster as you can accumulate the target amount earlier than the planned maturity date. The more you invest, the more you can accumulate with the power of compounding. Further, If your goals have a fixed maturity date, then you will have a higher accumulated wealth giving you more choices. 

3. Safety net for lower returns: At times, it may happen that the markets haven’t delivered the expected returns and/or at the time of goal maturity, the markets are in a bear phase. During such times, if you have increased your SIP more than initially planned, then it is likely that this risk is reduced. With additional wealth created with that extra top-up /new SIPs, you will have a margin of safety for market volatilities.

4. Better use of your increased income

When you get an annual increment, you may not immediately think of increasing your investments. But, if you top-up your SIPs annually by the expected increase in your income, you will automatically make prudent use of part of your risen income. Auto debits ensure you save and invest regularly. The proportion of your savings grows along with the rise in income and cost of living and maintains your overall savings ratio.

How to boost your SIP?

There are two ways to step-up your SIPs every year. 

1. Start a fresh SIP and decide how much more money per month you’d like to invest. You can do that either in the same scheme (the SIPs won’t get clubbed) or in another scheme in the same folio.
2. If you have an existing SIP and you want to increase your contribution, very few fund houses allow you to do that midway. However, most fund houses allow you to decide the top-up amount right at the time when you start your SIP, before you pay your first instalment. So, it is better to opt for a top-up SIP while starting your SIP.

Conclusion

SIPs help you become financially disciplined through regular investments. SIP top-up further ensures that you save and invest your disposable income to keep pace with inflation and growing income. It helps you build a superior corpus faster and accelerate the journey to reach your goals sooner. As a habit or a practice, always try and have top-up registered with your SIP the next time you start one. Every extra rupee saved, will add more towards your financial well-being.