Use The Power Of SIP & SWP To Retire Rich

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Use The Power Of SIP & SWP To Retire Rich
A combination of investment tools like Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) can comfortably yield the desired result for a comfortable retirement
Kapil Jain - 02 August 2022

Retirement planning is one of the most important financial goals but is often neglected. And by the time realisation sets in for financial security post-retirement, it becomes too late. At that stage, corrective actions often turn out to be less effective, and the corpus, thus collected, becomes inadequate.

This is where instruments such as mutual funds can play an important role. By investing regularly over the years, mutual funds offer efficient solutions to retire comfortably. The various investment tools available within the mutual fund universe can address not only your monthly cash flow requirement but also aid you in accumulating a sizable corpus to meet any emergencies which may occur. A combination of investment tools like Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) can comfortably yield the desired result for a comfortable retirement, and at times much more than you expected.

Here is a simple guide to retiring rich by investing through mutual funds.

Start Early and Invest for Long-Term: First and foremost, start early. That’s the first mantra to generate a sizeable retirement corpus. One must understand that time spent in the market is of utmost importance. The more the investment tenure, the larger the wealth creation probability.

Prefer Equity: If investing from an early age, age is on your side which allows risk-taking capacity. Invest predominantly in equity through diversified equity mutual funds which will help generate better risk-adjusted returns in the long run.

Invest through SIP: Systematic Investment Plan or SIP is an established and trustworthy way to generate long-term wealth. In SIP, you invest a fixed amount every month for a tenure of your choice. Remember to top up the SIP amount every year as your salary increases. For instance, you can put a top-up of 10% or 20% which will ensure that every year your SIP investment amount increases accordingly.

The powerful impact of SIP can easily be gauged from the fact that if an investor had started a monthly investment of Rs 10,000 without any top-up, say in a diversified equity fund for 30 years, he/she would have invested a total of Rs 36 lakh. Taking the long-term past average return of 15%, the value of this investment would stand at Rs 5.64 crore. In the case of a 10% yearly top-up, the value of the investment would be Rs 12.65 crore on a total investment of Rs 1.97 crore.

This is possible because SIP allows investors to accumulate units across all market phases, thereby averaging the holding cost. Add to this the compounding effect, and the wealth created can be much more than desired.

Protect your investment: As you turn 50 years of age, it is advisable to reduce your exposure to equities. At this stage, it is important to protect the wealth from market risks. Basis your risk appetite, you may allocate 50% of the portfolio to debt and the remaining across equity and gold. In case you are unsure how to go about this, shift your corpus to dynamically managed asset allocation schemes. Such schemes allocate money across debt and equity basis the market conditions and help mitigate risk to an extent. At the same time, keep the SIP into equities going as it will help generate wealth.

Withdraw through SWP: By the time you reach retirement age, you would likely have a comfortable corpus. At that stage, stop SIP and opt for SWP. This will ensure that you do not have to redeem your investment in one go. To meet your monthly expenses, SWP will ensure you get a fixed amount in your account by selling the required number of units. Meanwhile, the rest of your investment will continue to grow.

Let’s assume, the value of your accumulated corpus is, say, Rs 10 crore which is invested in an asset allocation scheme. You wish to have a monthly income of say Rs 1 lakh per month with a top-up of 10% every year. Assuming a return of 8%, by the time you are 80, you would have withdrawn nearly Rs 7 crore through SWP and would still have a balance of roughly Rs 34 crore.

To conclude, the combination of SIP during the investment phase and SWP during the retirement phase is a powerful combination to ease your financial life.

Kapil Jain is a gold medallist from IIM Indore and has experience of over two decades in the financial markets and advisory. Views are his personal and are not part of the Outlook Money editorial feature.

Kapil Jain (Investor/IIM Gold Medalist), Director, Enrichwise Financial Services Pvt Ltd

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