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There is no doubt that the systematic investment plan (SIP) has been one of the best innovations in the mutual fund industry worldwide. It inculcates two very important principles of investing—discipline and long-term approach. SIPs have given millions of retail investors the opportunity to create wealth over the long term without affecting their day-to-day lives.

Most investors hardly feel the pinch of systematic withdrawal from their bank accounts, and over a period of time, they consider it as a fixed monthly outgo just like a loan equated monthly instalment. This monthly ritual becomes a part of their financial lives as it is on an auto pilot. Had there been any kind of manual intervention on a regular basis, SIPs would have been a flop show.

Making best use of SIPs

There are a few ways in which SIPs can be put to better use that most retail investors are not aware of. The first being a perpetual SIP, i.e., where investments continue as long as you don’t stop them manually. Earlier, this facility was not available and hence most SIPs would hardly run for a year, two years or maximum for five years. And then at the time of renewal, the investor would look at the past performance and decide whether to continue or not. Also, one would require few signatures and other operational formalities, which would work as a speed breaker.

More often than not, when continuity stops, it interrupts the power of compounding. Many advisers have, in fact, been recommending only perpetual SIPs to their investors as these offer a win-win situation for all stakeholders.

The other much ignored aspect is that investors can increase their SIPs from time to time. Most investors would agree and have experienced that SIPs works best over the long term. However, it is an irony that they do not increase the quantum of investments over a period of time. Our income increases over a long term, as do our expenses; then why should our investments also not increase?

I had started investing Rs.10,000 a month via the SIP route in 2010, and as my income grew, I increased the amount to Rs.1 lakh per month. However, I have seen many investors who had started with a particular amount, and after 5-7 years of great returns, the SIP amount has remained the same. This could mainly be attributed to laziness more than anything else. And to combat this problem is where a step-up or top-up SIP comes in.

In a step-up SIP, the amount increases automatically at a pre-defined rate and period. Suppose an investor has a regular SIP of Rs.5,000 over 30 years. Then her total investment is Rs.18 lakh, which becomes Rs.1.76 crore at the end of 30 years, assuming a rate of 12% CAGR (compounded annual growth rate). However, if the same person starts with a Rs.5,000 step-up SIP at the age of 30 and mandates it to increase by 10% every year (in line with her increase in income), then over 30 years, her total investment adds up toRs.98.71 lakh. And assuming the same compounded return of 12%, the corpus will total to Rs.4.41 crore when she turns 60. The SIP amount in the final year was Rs.79,315 per month.

For a person earning Rs.5 lakh a year and with an annual income increase of 10%, this is not a difficult ask. This can also work well for do-it-yourself investors.

Most fund houses offer the option of topping up during commencement of the SIP. So, when you make an application for a fresh SIP, you have to specify whether you want to increase the investment amount periodically. Also, many fund houses allow you to increase the SIP amount either half yearly or once a year or even both. For example, let us assume you started an SIP with Rs.5,000, and you ask for a half-yearly top-up of Rs.500. So, after the first six months, your systematic investment will go up to Rs.5,500 a month. Then, after another six months, it will go up toRs.6,000, and so on. If you don’t wish to continue increasing your SIP commitment after a point in time, you will need to cancel it and begin a new one.

What is the right time to start such an SIP? Well, that would be when you are young, say, 25 or 30 years old. At this stage, we may have many goals in the form of marriage, children’s education, buying a house, and retirement planning. However, at this stage in one’s life, the amount of money that can be set aside on a monthly basis for these goals might be small. This is when we can start small and over time increase the amount according to our requirements. By doing this, we can ensure that the effect of power of compounding gets only bigger with time.

Increasing awareness

So, if the step-up SIP is such a great investment vehicle, why is it that it is hardly talked about? There are approximately 7 million SIPs running in the country as on December 2014, and I would be really surprised if even 2-3% of these are top-up SIPs. Maybe it is not being pushed enough. If you were to do a search for SIP top-up calculators online, you will not find it on any mutual fund website—which is rather surprising. So, the merits of this mode of investing should be talked about more. When SIPs were first introduced, it took a lot of nudging before it became popular among investors. Today, the product has become quite ubiquitous. It may be time to go to the next level of pushing to make the step-up SIP as popular

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