SIP Top-Up Strategy:

As a financially savvy individual, you have already taken the most crucial step of starting a mutual fund investment via SIP. However, as your career grows and your salary rises, so should your commitment towards your investments. You have two options to do this:

• Top up your SIP with a fixed amount each year.

• Top up your SIP by a specific percentage each year.

A SIP is not a set-and-forget tool; it is a long-term commitment to your financial future. The top-up feature allows you to increase your SIP contribution annually, and the method you choose can alter your wealth outcome drastically over a decade or more, so choose carefully.

Understanding the Two-Step Up Option

Fixed Top-Up

You add a fixed amount of money to your existing SIP every year. If you invest ₹5,000 per month currently and your fixed top-up amount is ₹500, your next year's SIP amount will be ₹ 5,500, and the year after that will be ₹ 6,000, and so on.

Percentage Top-Up

You increase your SIP by a specific percentage annually. If you invest ₹5,000 per month currently, with a 10% top-up, your contributions become ₹5,500 in the next year and ₹6,050 the year after, and so on.

When a Fixed Top-Up Makes Sense

The percentage method is not always a better choice; sometimes, for your financial situation, the fixed top-up makes sense. Choose the fixed top-up option if:

• You have an inconsistent income

• You are on a career break and can't afford a percentage top-up

A fixed top-up allows you to increase your SIP even when you are on a strict budget. You can commit to a modest fixed increase rather than promise a percentage you may not be able to sustain.

What Makes the Percentage Top-up Strategy Better

As your income grows every year, so does inflation. Rising inflation reduces the value of the rupee, and your fixed-amount contribution also loses value. If you have a fixed top-up of ₹1,000 per month, it may feel like a good increase for the next year, but 4-5 years down the line, the value of ₹1,000 will feel much lower, and 10 years later, it will feel minuscule.

In the percentage method, the top-up percentage takes advantage of your annual increment, thereby aligning your investment with your financial progress.

Here is a sample table to understand the difference:

Rohan and Arjun are colleagues who started a ₹10k SIP per month. Rohan opts to increase his SIP by ₹1,000 each year, while Arjun opts for a 10% step-up each year.

Here is a sample table to illustrate the difference in investment amount (SIP) over the long run.

Difference in Earnings in the Long Run

Here is how much both Rohan and Arjun will earn with their respective investments (as shown above). The assumed return of investment is 12% for both.

Reference: https://mutualfund.adityabirlacapital.com/investor-education/step-up-sip-calculator

Over 20 years, Arjun's SIP was worth almost ₹61,200, while Rohan's was worth ₹29,000. This meant that compounding worked on a much bigger scale.

Conclusion

If you have to choose between the percentage or fixed top-up plan, the smartest one is the strategy that can be sustained. However, if your financial circumstances allow, the percentage-based top-up is clearly more effective. It regards your SIP in the same way that compounding treats money, as something that should never stop growing.

Disclaimer:

The document is solely for the information and understanding of intended recipients only. Wherever possible, all the figures and data given are dated, and the same may or may not be relevant at a future date. Information gathered and material used in this document is believed to be from reliable sources. Further the opinions expressed and facts referred to in this document are subject to change without notice and ABSLAMC is under no obligation to update the same.

SIP does not assure a profit or guarantee protection against loss in a declining market.

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