Query: I strongly believe in the benefits of SIP and SWP. Currently, I am investing Rs 10,000 per month and expecting a return of 12% per annum. My plan is to continue this investment for the next 20 years, with an annual increase of 10%. I am 40 years old and am considering this approach for building my retirement fund. Is this strategy feasible and suitable for my retirement goals?
Advice by Animesh Hardia, Senior Vice President, Quantitative Research at 1 Finance:
Stepping up your investments year on year with salary increments is one of the best strategies for building a sizeable investment corpus.
For example, your Rs 10,000 monthly investment for 20 years, assuming a 12% return and a 0% annual SIP increase, will grow to nearly Rs 1 crore. By simply increasing the SIP amount by 10% every year, the corpus you’ll accumulate will be almost twice as big at Rs 2 crore.
So, step-up investing is the way to go. But there is more to retirement planning than just corpus building. It is actually a phase that could span 20-30 years. What you also need to think about are factors like:
– How will I generate passive income post-retirement?
– Where will I retire: Tier 1 or Tier 2 city?
– Will it be a complete retirement or a phased one?
– How will I allocate my time post-retirement?
– Which financial instrument to choose for investment?
Our research indicates that National Pension Scheme is one of the best low-cost solutions for investing in retirement. For the amount available for a tax deduction (self + employer contribution), NPS is better than EPF, PPF, and most mutual funds.
So, long story short, for prudent retirement planning, keep stepping up your investment amount as your salary grows, build a well-diversified portfolio, and also consciously choose financial products that help you after retirement also. Your golden years are for spending your time living a fulfilling life, and your investments should support that.
What are SIP and SWP in mutual funds?
In essence, SIPs involve making investments, STPs involve transfers, and SWPs involve withdrawals. Using a systematic investment plan (SIP) allows for the gradual accumulation of wealth over time, while a systematic withdrawal plan (SWP) enables individuals to withdraw a fixed amount regularly from their existing investments. By combining these strategies, individuals can both build wealth and generate income simultaneously.
SIP, systematic transfer plan (STP), and SWP are all strategic approaches to investing and withdrawing from mutual funds. Each option can be selected based on individual needs and goals.
To summarise, SIP involves investing in Mutual Funds systematically, STP involves transferring funds between Mutual Fund plans systematically, and SWP involves withdrawing money or redeeming Mutual Fund units systematically. SIP and STP focus on investments, while SWP focuses on withdrawals.
Tax Implications: When it comes to Systematic Investment Plans (SIPs), each SIP is considered a separate investment for tax calculation purposes when redeeming from the plan. As each transfer in Systematic Transfer Plans (STP) is treated as a redemption, profits from investments are subject to taxation. Additionally, individual withdrawals from Systematic Withdrawal Plans (SWP) result in taxable gains.
Suitability of Investment Plans: SIP investments are well-suited for regular savings and investments, contributing to long-term capital appreciation. STP plans are recommended when an investor needs to transition into a different scheme based on their risk-return profile and financial objectives. SWP plans are ideal for meeting individuals’ regular income needs, particularly for older individuals. They can also be used to fund recurring expenses like EMIs and school/college tuition, offering the potential for high returns while providing regular payments.
An SIP can involve consistent or fixed investments made over a predetermined time frame. In contrast, an STP refers to a regular and fixed amount that is moved from one mutual fund to another scheme. Lastly, SWP entails regular and fixed withdrawals from schemes over a specified period of time.