I plan to start an SIP from next month. While registering online, I was asked if I’d like to select the top-up option. When I get a salary hike, is it advisable to top-up the current SIP or start a new one?
—Vidhi Kumari
SIPs have traditionally referred to a steady investment of the same amount of money on a particular date every month. For example, one would invest ₹5,000 evenly split between two mutual fund schemes on the 5th of every month for, say, 10 years. However, these days, there have been many changes to this rather static notion of SIP thanks to the advent of digital platforms as well as AMCs adopting digital means of transactions. As a result, SIPs do not need to be for a particular tenure. Another change is the one that you have indicated—SIPs can now periodically change the amount based on some preset rule. These are called step-up SIPs, and some platforms call them top-up options. Regardless of the name, what it means is the ability to change (increase) the amount of SIP on a periodic basis by a fixed amount. For example, if one is running a ₹3,000 SIP in a particular fund, they can set it up so that the SIP amount increases by ₹1,000 every year. This way, the SIP becomes one of ₹4,000 in the second year, ₹5,000 in the third year, and so on. For salaried professionals, who can reasonably count on a pay raise every year, this method empowers them to automatically increase their SIP every time their ability to save goes up.
When you have a well-diversified portfolio that gets reviewed once a year, there is no need to keep adding new funds to the portfolio (new SIPs) just because you are adding to the amount that you are investing. You can simply add to the existing portfolio. On the other hand, if you start with a simple one-scheme portfolio as a beginner, up until the point that you have a well-diversified portfolio, I would recommend that you build out the portfolio before adding more money to the same single fund.
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Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com. Queries and views at mintmoney@livemint.com