For many salaried folks, the yearly appraisals must be round the corner. But even if you get lucky with annual increments, a higher income may not automatically translate into higher savings. With a traditional Systematic Investment Plan (SIP), you invest a fixed amount of money, say, ₹5,000 a month. But when your income grows and you can save ₹7,000 per month, you will have to start a fresh SIP for the additional amount or modify your SIP amount if your investing platform provides such a facility.
There is an easier solution and it’s called Step-up SIP, also known by names such as Top-up SIP or SIP Booster.
Here, you can increase your monthly SIP investment amount periodically at a fixed rate, allowing you to increase your mutual fund investments as your income grows.
How it works
The Step-up SIP facility helps automatically increase your monthly SIP instalments at pre-set intervals (half yearly/yearly). That is, you can instruct the fund house to increase your monthly instalments by a said amount, say, ₹1,000 or 10 per cent, at the end of, say, one year. The SIPs in every subsequent year will also be hiked by the same amount (or percentage), ensuring financial discipline.
Besides using this route to invest your salary hike, you can also adopt this strategy during times when you cut down expenses by a said amount, with every passing year. Net-net, you can instruct the Asset Management Companies (AMCs) to invest the surplus savings in your existing schemes, after specified intervals.
Upping your investment at regular intervals has its own perks. Compounding the gains over time, the incremental investments can help you achieve your financial goals faster. Besides, it can also serve as a hedge against inflation, helping you plan ahead for the likely increase in the cost of your goals — such as purchasing a home, funding child’s education or vacation tour package.
How to apply
Investors need to opt for Step-up/Top-up/SIP Booster plans at the time of starting their SIPs. Existing investors can cancel the current SIP and opt for a fresh one, with a top-up facility. Do keep in mind that the folio remains the same. Depending upon the maximum amount stipulated by you in the bank mandate, you may be required to make necessary changes in your bank mandate (or ECS mandate) to streamline the monthly debits from your bank account.
One can decide to increase the amount of SIP by a fixed sum or a fixed percentage. The frequency of reset allowed is either once in six months or one year, depending upon the scheme of investment and the fund house. The minimum incremental amount (or percentage rise) required to be added to the monthly SIP also varies with fund houses — mostly ranging from ₹100 to ₹500.
Besides, investors can also decide an upper limit for the top-up in SIP instalments. The step-up facility stops enhancing the SIP instalment beyond such levels stipulated by the investor. However, the SIP amount will continue for the tenure chosen by the investor. Some AMCs such as ICICI Prudential also allow investors to set the date from which the top-up facility shall cease and subsequent SIP amounts shall remain constant.
When uncertainty strikes
The top-up or step-up facility is a good feature for those who are sure of regular increments. But what about situations like the current times, when salaried folks had to deal with unplanned mishaps such as pay cuts and job losses?
During any such financial turmoil, an investor (including those who have opted for the top-up or step-up facility), has the following options. If the stress in finances is of a shorter tenure, the investor can opt for the ‘Pause SIP’ option. Fund houses and MF aggregator platforms allow investors to pause their SIP debits (entire SIP, not just the incremental amount) for a maximum of three months, after which the debits restart automatically. This facility can, however, only be used once during the tenure of the existing SIP.
During prolonged periods of stress, the investor can opt for either modifying the SIP (to remove the step-up option, or for investing lower amounts) or cancelling the SIP entirely. This can also come in handy for those who have exhausted their ‘Pause SIP’ option. By using such options, not only does your accumulated funds (till date) continue to yield returns but one can also restart the SIP investments at a later date when cash inflows resume. One can then choose whether or not to opt for a step-up/top-up plan again.
Do keep in mind that any such requests for pause/modification/cancellation of SIP should be done within 15 to 30 days prior to the date of SIP (varies across fund houses).
(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online. )