Home / Money / Personal Finance /  SIP top-ups can help your savings grow in line with rise in income

One frequent advice given to mutual fund investors these days is topping up their systematic investment plans (SIPs), to participate in equity opportunities as the economy grapples with the impact of the covid-19 pandemic. Here is what you need to keep in mind while considering this option.

The SIP top-up facility allows you to increase the SIP instalment by a defined amount after a defined interval. This could be as a percentage of the existing SIP instalment amount, say, 10%, or multiples of a minimum amount defined by the mutual fund, say, multiples of 500. The frequency of increasing the amount is, typically, half-yearly or annual.

You can specify the upper limit to cap the top-up either in terms of the amount or the month and year. The top-ups will stop when the defined cap is reached. The SIP will, however, continue for the tenure you have chosen, with the instalment remaining at the capped level. Once you sign up for the top-up facility, you cannot change it. If your income does not support the increases, you will have to cancel the SIP.

The top-up facility is an efficient way to keep your savings growing in line with your income. Use it to build your allocation to a preferred asset class over a period of time in line with your income and ability to take risk.

The current correction in the equity markets has given an opportunity to invest at attractive valuations, and the top-up facility can help build a portfolio over a period of time in line with growth in income. “It helps get to their desired asset allocation quickly and reduce the cost of acquisition of units. SIPs, including top-ups, are a good way to approach long-term investing needs without being very hands-on," said, Naveen Rego, a Sebi-registered investment adviser.

As a tactical strategy to deploy lump sums or investible surpluses to benefit from low levels in the equity market, the top-up facility may not work as efficiently since the increase in the instalment amount is, typically, done only once every six months or annually, and investors may not have the benefit of low prices.

Rego said the impact of the top-up as a strategy to benefit from market falls will depend upon what portion of the total exposure to the market is actually being brought in at attractive levels. Typically, unless this is a significant portion, the impact too will be muted. A better strategy would be to invest the surplus available through a systematic transfer plan over the next six to 12 months or stagger lump sum investments whenever there is an opportunity.

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