What is Top up and Step up, SIP in mutual funds?
Created on 06 Jun 2019
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Updated on 16 Nov 2022
A Systematic investment plan refers to investing a fixed amount of money at fixed intervals like monthly, weekly, or quarterly. If the investor can earn more while still invested in SIP, then he can either start a new SIP or can top-up the current SIP to invest more. Top-up SIP is a feature in which an investor has an option to raise the systematic instalment value by a fixed amount. This feature is provided by many mutual funds. This enables the investor to invest a higher amount of money during the tenure of SIP.
Top-up is usually done in multiples of 500, 1000, etc. It means that you can raise your top-up value only in specific denominations. The top-up can be availed through direct debit or ECS mode. You cannot change the top-up amount once enrolled for it.
Benefits of preferring a step-up SIP over a traditional SIP
- Step-up SIP allows you to invest in the same SIP with a higher amount of investment for better returns. On the contrary, a conventional SIP does not give this flexibility of topping up your investment value. In conventional SIP, you need to start a new SIP every time.
- Step-up SIP allows you to start with low investment value. Later, when you are ready to invest more, you can continue in the same top-up SIP, which gives you better results due to the power of compounding. In a conventional SIP, you have to stick to the same investment value that you started with.
- Step-up SIP helps you to beat inflation as the power of compounding helps you to multiply wealth quickly. Since you can raise your investment value, the returns are more promising, but the same convenience cannot be availed in a conventional SIP.
The Challenges faced in a top-up SIP
Here, are a few challenges that are faced in a top-up SIP:
- Yearly increment of income: Opting for a top-up SIP is based on the belief that your income would constantly hike year by year. But, there can be times when due to some unforeseen circumstances you may end up spending a lot more than expected. This may leave you with a little amount to keep up the promises of your top-up SIP scheme.
- Surplus expenses: At times, due to a new addition in the family or due to a change of location of stay, it may invite a lot of additional expenses. This may make top-up SIP commitments a bit challenging at times.
Top-up SIP is a boon for many investors who want to start immediately with less investment and would want to scale it up later as their income grows. Therefore, a top-up SIP is much more preferred than a conventional one.
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