You can increase your SIP amount periodically

With top-up or step-up facility, you can increase your investment in an ongoing SIP

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A systematic investment plan (SIP) allows you to put a fixed sum of money every month in a mutual fund. But most of us get a raise in our salaries every year. This means we can afford to increase our investments. But how do you do that in an SIP that is already going on? Enter top-up or step-up facility. It is important that as your income grows, the quantum of investment should grow too.

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Here's why: Say, you invest Rs5,000 every month for the next 20 years. Assuming that your fund grows at a modest 12% a year, you will end up making Rs49.46 lakh on your total investment. But if you slightly increase your SIP amount every year, once a year by 10%, then you will end up making Rs98.45 lakh. That's a difference of Rs48.99 lakh or 100%. Small additions help you in a big way later.

How to do it
Earlier, very few fund houses used to offer the facility to top-up SIPs. Now, most offer it but it is still best to check with your financial adviser or distributor which fund houses offer and which don't.

There are two ways to step-up your SIPs every year. The traditional option is to simply decide how much more money per month you'd like to invest and then start a fresh SIP. You can do that either in the same scheme (but the SIPs won't get clubbed) or in another scheme in the same folio. If, however, you have an existing SIP and you want to increase your monthly 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.

Keeping the technicalities aside, the reason why a change of SIP amount calls for a separate procedure is that an SIP is a mandate that you give your bank to debit your savings account regularly. This mandate, once registered, applies to that SIP transaction specifically, and cannot be changed. However, because of the new National Automated Clearing House (NACH) system put in place by the National Payments Corporation of India (NPCI), you can now give one-time mandates that allow you to make fresh investments at a later date, to the extent of the amount and debit frequency that is registered.

Every fund house has a common application form as well as an SIP form. In the SIP form, after you fill your basic SIP details like start date, monthly investment amount and SIP end date; there are a few other details right below these that ask you if you'd like to top-up your SIPs in the future. Some fund houses allow you to top-up every 6 months; many others allow you an annual increase. In simple words, every year, once a year you can increase your amount and then that increased amount will be your monthly investment for that year. The following year, again, your amount will increase once, to be valid for the remainder of that year.

Keep in mind
Decide on the amount you want to increase your SIP by, or by percentage. You can also cap your amount in case you think you won't be able to afford a monthly investment beyond a point. For instance, in our example above, a 5% annual increase would mean you would need to invest Rs11,790 every month in the 10th year and Rs30,580 in the 20th (final) year. Once your monthly instalment hits the ceiling, your top-up facility stops and then you keep investing that same amount for the rest of your SIP tenure.

In arrangement with HT Syndication | MINT

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