As part of your financial planning, it’s important to invest for the future and aim to secure a fixed income in retirement. Traditional investment options such as fixed deposits and bonds offer stability, but often come with low returns that don’t beat inflation. Even pension plans may provide relatively modest returns. However, his strategy of combining SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan) in mutual funds could provide a solution that generates higher fixed income during the withdrawal period. This article provides the following insights: With a monthly SIP of Rs 5,000, you can earn a monthly bond income of Rs 1.8 million in a mutual fund for 30 years.
What is SIP in mutual funds?
A systematic investment plan, commonly known as SIP, is a method of investing in mutual funds that allows investors to invest fixed amounts at regular intervals such as weekly, monthly, or quarterly. A popular option is monthly SIP. It helps investors save in a disciplined manner and benefit from compound interest over the medium to long term. With monthly His SIPs, investors no longer need to time the market, reducing the impact of market volatility.
For example, consider an individual who decides to invest Rs 10,000 every month in a mutual fund through SIP. This individual invests the same amount every month, regardless of market conditions, leading to significant wealth creation in the medium to long term.
Did you know that there is 10 Mutual Funds where 10,000 SIPs reached Rs 52 million in 10 years.
What is SWP in mutual funds?
A Systematic Withdrawal Plan (SWP) is a feature provided by mutual funds that allows investors to withdraw a set amount of money on a regular basis, regardless of whether the mutual fund is profitable or not. SWPs allow investors to generate a stable income stream from their investments, similar to bond income, while preserving their invested capital. Investors can also withdraw larger amounts from their principal if they wish.
For example, imagine a retiree who has accumulated large sums of money in mutual funds over the years. Instead of withdrawing a lump sum, you can opt for SWP and receive a fixed income every month. This way, you can ensure that you have regular cash flow to meet your living expenses without having to liquidate your entire investment.
What is the potential return of mutual fund SIP?
In the past, mutual funds produced annual returns of 12% to 15%, although they were not guaranteed. However, it is safe to assume that there is a 12% return. If he invests Rs 5,000, how much return of 12% can he accumulate in 30 years? Let me give you an example.
Rajesh, 30, invests 5,000 SIPs every month in a mutual fund scheme. If her average annual return is 12%, then her investment for next 30 years (31-60 years) will be Rs 18 million (Rs 5,000 x 360 per month) and her cumulative corpus including returns will be: . Approximately 1.77 billion rupees. This significant corpus is created as a result of consistent investments compounded over time without market timing.Below is a snapshot Investment Trust SIP Excel Calculator. You can download and customize it according to your needs.
How can a mutual fund SWP provide a fixed income income stream?
Once this amount has been accumulated for 30 years, the investor can select SWP in mutual funds to generate a fixed income stream for 30 years upon retirement.
Continuing with the above example, Mr. Rajesh has accumulated Rs 1.77 crore and at the age of 60, he feels that he would like to withdraw the entire amount in the next 30 years (from his age of 61 to 90). Assume that there is. He can choose to withdraw his 180,000 rupees per month using his SWP. This amount can provide enough fixed income to address various expenses and meet your retirement needs.
Below is a snapshot Investment Trust SWP Excel Calculator. You can download and customize it according to your needs.
Can I increase the SWP amount?
There are several ways:
Increase SIP amount. If you increase the SIP amount, the accumulated amount will also increase, so you can also increase the SWP withdrawal amount. Alternatively, he can increase his SIP over time through increased business income or salary appraisal.
Invest in high-risk, high-return funds. Flexicap funds, mid-cap and small-cap funds generate higher returns compared to large-cap and index funds. Risk-oriented investors can add these funds as part of their mutual fund portfolio to increase their accumulated wealth. It should be noted that these are: High risk, high return investment trust.
Shorten the SWP period. Although this may not be the right approach, you can reduce your SWP period from 30 years to 25 or 20 years and increase your SWP amount. This approach should only be followed if you have another set of investments besides these mutual fund portfolios.
Is there any risk in this 30-year strategy of SIP + SWP?
Although the strategy of investing through SIP and generating income through SWP has some advantages, this strategy also has some negative and risk factors.
Zero balance after 30 years: This 30-year SIP + SWP strategy is good, but expects the full amount to be taken out. This strategy is not for investors who want some wealth to survive past age 90.
Market volatility: Investments in mutual funds are subject to market risk and returns are not guaranteed. Fluctuations in market conditions may affect the value of your investments. The impact of this risk may be small due to the long investment and withdrawal periods.
inflation: Although SIPs and SWPs aim to combat inflation, investors must consider that their purchasing power will decline over time. The fixed income generated may not keep pace with rising costs of living. Simply put, a monthly income of Rs 1.8 million today will not be the same in 30 years.
Fund selection: It’s important to choose the right mutual fund based on your investment goals, risk tolerance, and time horizon. Investors should also: Protect your mutual fund portfolio from mutual fund fraud. Such risks can be mitigated by investing in AMCs and various market capitalization mutual funds.
Tax implications: Capital gains from investing in mutual funds are subject to tax. The amount shown is before tax, but the after-tax amount will be lower.
Which are the 10 mutual funds you can invest in through SIP?
There are hundreds of mutual funds, and investors can filter funds based on financial goals, risk appetite, and holding period. Since the objective is to create a long-term retirement corpus, you can consider long-term funds. For investors with a high risk appetite, you can also add flexi-cap, mid-cap, small-cap mutual funds and international mutual funds.
Which 10 Mutual Funds to Use for a Scheduled Withdrawal Plan?
The objective here is to protect the created corpus and aim for stable income while monthly withdrawals occur.
Balanced advantage funds or hybrid mutual funds may be your best choice.
I’ve recommended it before, but 15 Most Recommended Mutual Funds for Investment Covers all mutual fund categories including hybrid funds.
Alternatively, you can choose a bucket strategy that allows you to invest in two to three segments of mutual funds. As I previously explained in this article, How a bucket strategy can help you build long-term wealth.