Why should you opt for SIP Top-Up?

Systematic Investment Plan or SIP is one of the most popular ways of investing in mutual funds in India. More than Rs 10,000 crores gets invested through SIPs every month for the last few years. In FY 2022-23, Rs 1.56 lakh crores were invested in equity mutual funds through SIPs (source: AMFI, as on 31^st March 2023).

Using SIP, you can invest a fixed amount from your savings at regular intervals e.g. weekly, fortnightly, monthly etc. There are numerous benefits of SIP. You can start investing in mutual funds with relatively small amounts from your regular savings. SIP keeps you disciplined in investing because you do not need to time the market. You can benefit from the power of compounding over long investment tenures by investing in SIPs. Through SIPs you can take advantage of market volatility through Rupee Cost Averaging.

What is SIP Top-up?

SIP Top-up is a mutual fund facility by which you can increase your SIP instalments at regular intervals e.g. half yearly, annual etc. You can specify the SIP increment either in Rupees or in percentage terms. Let us assume that you have a monthly SIP of Rs 10,000 in mutual fund scheme. If you opt for Rs 1,000 SIP top-up on an annual basis, your monthly SIP instalments will be Rs 11,000 after one year and Rs 12,000 in the following year. If you opt for 10% SIP top-up on an annual basis, your monthly SIP instalments will be Rs 11,000 after one year and Rs 12,100 in the following year.

How does SIP Top-up work?

Let us assume you start a monthly SIP of Rs 10,000 in an equity mutual fund scheme for 10 years. You opt for a SIP Top-up facility with annual increments of Rs 1,000. If you did not opt for SIP Top-up, then your cumulative investment over 10 years would have been Rs 12 lakhs (Rs 1.2 lakhs per year X 10 years). The table below shows your yearly cash flows with SIP Top-up.

Note: Numbers in the table are purely illustrative for investor education purposes only

How does SIP Top-up help in wealth creation?

Continuing with the above example, let now see how much you could accumulate in your mutual fund scheme over 10 years with and without SIP Top-up. Let us assume that the scheme gave 12% CAGR returns over the investment tenure. You can see in the table below that with an additional investment of Rs 5.4 lakhs, spread over 10 years, you create additional wealth of nearly Rs 12.7 lakhs. In other words, you could nearly earn Rs 7.3 lakhs extra profit due to SIP top-up.

Note: Numbers in the table are purely illustrative for investor education purposes only

SIP Top-up Wealth Creation with SBI Magnum Midcap Fund

The chart below shows the growth of Rs 10,000 monthly SIP in SBI Magnum Midcap Fund over the last 15 years for regular SIP and different percentage top-ups. You can see that wealth creation potential is much greater with SIP Top-ups.

Source: mutualfundtools.com, as on 25^th April 2023

Let us now see, how much extra wealth was created for different top-up percentages for 15 year SIP in SBI Magnum Midcap Fund.

Source: mutualfundtools.com, as on 25^th April 2023

Why should you do SIP Top-up?

Your income usually increases over time due to annual increments and also with promotions to senior roles as you progress in your career. In a regular SIP, your monthly investment is fixed even though your income may have increased considerably. Let us assume you are investing through a monthly SIP of Rs 10,000 and you are getting average annual increment of 10%. In 7 years time, your salary would have doubled but your monthly investments remain the same. Using a SIP Top-up facility you can increase your monthly investments in line with your increase in income. SIP top-up can help with lifestyle improvements, higher wealth creation and achieve your financial goals faster e.g. early retirement. SIP top-up is good investment option to achieve your long term financial goals.

Benefit of SIP Top-up for Mutual Fund Distributors

While SIP Top-up has obvious benefits for long term investors, it can also help mutual fund distributors (MFD) to grow their book of business in a very effective and efficient way. With one time effort a MFD can build a much bigger SIP book and revenue base for practice, as we will demonstrate in the example below. Let us assume, as an MFD your monthly average SIP size from a customer is Rs 5,000 and average SIP tenure is 10 years. You and your team are able to mobilize 50 new SIPs every month. Suppose your trail commission is 0.75% and scheme CAGR returns is 10%. Let us see how much your AUM and revenues will grow, without top-up and with 10% annual top-up (please see the table below).

Source: mutualfundtools.com,

You can see that with one time effort of getting your investors to opt for SIP Top-up, your AUM by year 10 could be higher by Rs 80 crores and your revenues will be higher by more than Rs 50 lakhs. Investors opting for SIP Top-ups are likely to take a longer term view and less likely to stop their SIPs or redeem. You can build stronger client engagement and long term relationships with your clients. It will be a win-win for both you and your investors.

As we have seen in the above examples, top up in a mutual fund SIP is a win-win proposition for both, investors as well as mutual fund distributors.