Investing in mutual funds via a systematic investment plan (SIP) has become popular among young investors. While SIPs are an excellent investment strategy, a lesser-known variant, top-up SIPs, provides even greater advantages.
Here is why a top-up SIP is better than a regular SIP investment in India.
What is a top-up SIP?
As an investor, you can raise your annual SIP amount via a SIP top-up feature. With the use of this tool, you can choose to increase your SIP instalment at predetermined intervals by a predetermined amount or percentage. While some fund companies call it SIP step-up option or SIP booster, others refer to it as top-up.
The power of compounding
One of the most significant advantages of top-up SIP is the ability to leverage the power of compounding. By increasing your investment amount on a regular basis, you contribute more to your investments and speed up the compounding effect.
Compounding is the process by which your investments grow over time. Your returns accumulate faster as your investments compound, allowing you to reach your financial goals sooner.
The compounding effect can be extremely beneficial to your investments. Consider an example to understand this better. Assume you begin a top-up Systematic Investment Plan IP with a monthly investment of Rs 500 and decide to increase it by 10% each year. Assuming an average annual return of 12%, after 20 years, your investment would have grown to over Rs 500,000. This exponential growth is made possible by the power of compounding through top-up SIPs.
Advantages of top-up SIP
Beat inflation effectively: Inflation erodes the purchasing power of your money over time. By opting to start a top-up SIP online, you ensure that your investment grows in absolute terms and beats inflation, maintaining the real value of your wealth.
Adapt to income growth: As your income rises due to career advancement or business success, a Top-Up SIP allows you to adjust your investment to match your financial capacity seamlessly. This ensures that you continue to contribute significantly to your investment portfolio.
Harness market volatility: Market conditions can change, and opportunities can emerge during times of volatility. With a Top-Up SIP, you can profit from market drops by increasing your investment when prices are low. This strategy, known as rupee cost averaging, allows you to purchase more units when prices are low and fewer units when prices are high, lowering your overall investment cost.
Build wealth faster: Increasing your SIP amount regularly accelerates the wealth-building process. The additional contributions compound alongside your existing investments, propelling your portfolio to new heights. To understand how much returns you will get, use a top-up SIP calculator to reach your financial goals faster.
To wrap up
Top-up SIPs have several advantages over regular SIPs, which makes them appealing to mutual fund investors like you. You can improve the effectiveness of the top-up SIP strategy by automating your investments, diversifying your portfolio, and regularly monitoring your investments. Consider adopting the top-up SIP strategy to maximise your investment returns personalise your savings journey and take control of your financial destiny.