Monday, February 20, 2017

SIP Top Up - a very good facility for the salaried class

My article in Gujarati Mid-day today on SIP Top-up facility


The English translation is as under:

Earlier, we have discussed about the benefits of SIP and also seen how it works. We highlighted the two major principles on which the concept of SIP works, viz., “Rupee cost averaging” and “power of compounding”. The power of compounding helps one accumulate large sum of money through small regular contributions. We know that small drops make an ocean. It is the same with SIP, too.
An investment of Rs. 5,000 per month for a period of 25 years adds up to more than Rs. 65.00 lacs, if the investment grows at 10% p.a. yes, every drop makes an ocean.
Well, there is practical difference here. Of course, we do not know the exact return that any scheme would be able to generate in future, there is a small difference between an illustration as above and real life. In real life, most of the time, the ability to save also increases. How do we factor for that?
That is where mutual fund companies came up with a practical and a very useful innovation known as SIP top ups. In this case, the monthly SIP amount is increased periodically. Let us assume for the purpose of simplicity that the amount is increased every year at the rate of 5%.
Thant means, in our example above, while the investor started with monthly investment of Rs. 5,000; the same was increased to Rs. 5,250 per month in the next year (Rs. 5,000 plus 5% growth on that). In such a case, the accumulation would definitely be higher, since the invested amount keeps increasing.
The calculations suggest that the amount accumulated would be more than Rs. 1.50 cr. Compare this to Rs. 65 lacs accumulated if the invested amount was not increased.
There are schemes available that allow an investor to increase the amount by a certain percentage (as shown above) or by a certain amount, say Rs. 500 per year. There are schemes that allow an investor to top up the SIP amount every six months, too.
If you expect your income to grow year after year, it is logical that the savings would also grow. In such a case, SIP top up is an ideal choice for most people earning regular income.

- Amit Trivedi

1 comment:

  1. Hey, thanks for the information. your posts are informative and useful. I am regularly following your posts.
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