Everyone wants to create wealth but very few have a foolproof wealth creation plan. The idea of becoming rich can only be brought into reality when one decides to begin systematically investing and continue this investment journey until he or she is able to accumulate the desired corpus. One way to create long term wealth is by starting a SIP in mutual funds. Mutual funds may not guarantee capital appreciation but in the long run, one can expect to earn decent returns through systematic SIP investments.
But what exactly is SIP and how can mutual fund investors must benefit from it?
Systematic Investment Plan
Commonly referred to as SIP, a Systematic Investment Plan is one of the two ways in which investors can invest in market linked schemes like mutual funds. Investors can also choose to make a lumpsum investment or if have surplus cash that is sitting idle. Otherwise, they can start a monthly SIP and periodically invest a fixed sum for a fixed or undefined duration. That’s because SIPs do not have any lock-in period. However, the scheme in which the investor starts the SIP may have a lock-in period. For example, funds like ELSS (Equity Linked Savings Scheme) and retirement savings fund or children’s gift fund have predefined lock-in periods and once you invest in them, you may not be able to withdraw the investments till the lock-in period is over. However, even if you start a SIP in any such schemes, you are not obligated to continue investing till the lock-in ends. SIPs are highly flexible, and investors can stop their SIPs at any given time, but it is recommended to continue investing till one can achieve their ultimate financial goal. One can even skip their SIP investments if they have a financial situation in a particular month and then continue their SIP as usual in the following month. There are no penalties involved for stopping or skipping your SIP.
If you wish to create more corpus than what you need or if there are any changes in your long term financial goals, you can increase your chances of earning more capital appreciation by topping up your SIP investments.
What is a SIP top up?
As you may have guessed, a SIP top up allows the investor to increase their monthly SIP sum at periodic intervals. The investor can give the AMC the consent to increase their SIP by 10 percent after every 12 months. The investor can make these changes manually as well. Also, there are no rules that the top up only has to be 10 percent. For example, if you have been Rs 25000 for the past 12 months you can increase this sum to any figure that they want. There is no upper cap on SIP which allows retail investors to invest a sum that is feasible for their risk appetite and investment horizon. Year after year, like the annual income increases you can choose to invest this sum in mutual funds by increasing your monthly SIP.
Here’s an example of how you can use the top up SIP feature to achieve your goals earlier than anticipated –
Suppose you wish to accumulate 3 lakhs in the next 12 months to make the down payment of the brand new car that you are planning on buying. Now if you start a monthly SIP of Rs 25000 you will be able to achieve this corpus in 12 months and may even use the interest earned to get new accessories for the car. However, if you start your SIP with Rs 25000 and increase Rs 1000 every month, you would have invested Rs 66000 more or you can stop your SIP after 10 months as you would have got the desired sum in hand. This is the power of top up SIP.