SIP Top-up

A salary rarely stays the same for ten years, but a plain SIP does. The Top-up facility fixes that mismatch.

When you register, you tell the fund to increase your SIP instalment at intervals you choose, say every year, either by a fixed rupee amount or by a percentage. Your saving then grows with your income without you having to fill in a new form each time.

The workbook frames it as a way to "enhance the disciplined savings of investors" as "income and investible surpluses go up".

From Chapter 9 (Investor Services):

• Investors can increase the SIP amount at intervals chosen by them.
• The increase can be a fixed amount or a percentage of the existing SIP amount.
• Investors may set an upper limit for the SIP, or a date from which the top-up will cease. Once the cap or date is reached, the top-up stops, but the SIP amount along with the top-up amount remains constant until the end of the SIP tenure.
• Top-up can be registered at the time of enrolling for the SIP; an existing SIP investor can also register for it, giving the correct scheme or plan, frequency, duration and amount of the existing SIP.
• Micro-SIPs: mutual funds may not offer top-up, or may allow it only if the SIP plus top-up does not exceed Rs 50,000 in a rolling 12-month period or financial year.

Payment modes for SIPs include post-dated cheques, NACH, direct debit and standing instructions.

Fixed top-up:      Instalment in year k = Base + (k − 1) × Top-up amount
Percentage top-up: Instalment in year k = Base × (1 + g)^(k − 1)

(annual top-up, before any cap is reached)

The workbook's Chapter 9 illustration: a monthly SIP of Rs 2,500 for 3 years, topped up annually.

Fixed top-up of Rs 500 a year:

Year 1: Rs 2,500 × 12 = Rs 30,000
Year 2: Rs 3,000 × 12 = Rs 36,000
Year 3: Rs 3,500 × 12 = Rs 42,000
Total invested        = Rs 1,08,000

10% top-up a year:

Year 1: Rs 2,500 × 12 = Rs 30,000
Year 2: Rs 2,750 × 12 = Rs 33,000   (2,500 + 10%)
Year 3: Rs 3,025 × 12 = Rs 36,300   (2,750 + 10%)
Total invested        = Rs 99,300

Without any top-up: Rs 2,500 × 36 = Rs 90,000.

Over three years, the fixed Rs 500 top-up adds Rs 18,000 and the 10% top-up adds Rs 9,300. On a longer SIP the percentage version catches up, because 10% of a growing instalment eventually exceeds a flat Rs 500. (Arithmetic, extending the same two plans: the 10% increase first exceeds Rs 500 once the instalment passes Rs 5,000, which from Rs 2,500 happens in year 9; the percentage instalment itself overtakes the fixed one only in year 16, at about Rs 10,440 against Rs 10,000.)

With a cap: if the investor had set an upper limit of Rs 3,000, the fixed top-up would stop at Rs 3,000 in year 2 and stay at Rs 3,000 until the SIP ends.

Chapter 9 (Investor Services) describes the SIP Top-up facility with the Rs 2,500 illustration and the Micro-SIP condition. Expect a calculation of the instalment in a given year under a fixed or percentage top-up, and a question on what happens after the cap or cease date (the amount stays constant).

• Percentage top-up compounds on the current instalment, not the original. Year 3 at 10% is Rs 3,025, not Rs 3,000.
• After the cap or cease date, the SIP does not revert. The topped-up amount stays constant till the end of tenure.
• Existing SIP investors can add a top-up; it is not only at enrolment.
• Micro-SIPs: may be excluded, or capped at Rs 50,000 (SIP plus top-up) in a rolling 12 months or financial year.
• Top-up is chosen by the investor, both the interval and the amount or percentage.
• A top-up raises the amount invested; it does not change the rupee cost averaging logic of buying more units when prices are low.