SIP, STP and SWP- The Unsung Trio of Financial Planning

 Financial Freedom is a dream any individual sees for himself. All of them wants to achieve this dream, but they fail to plan. Due to lack of knowledge and fear of downward risk, they fail to plan. This fear of failure makes them stick to investment in traditional fixed deposit and recurring deposit only.

“Planning is bringing the future into the present, so that you can do something about it now”- Alan Lakein.

 Investors should come out of their comfort zone and explore new investment opportunities. One such opportunity is investment in mutual funds. Basically Mutual Funds are managed by experienced fund managers who raise the funds from retail investors and invest in pool of assets which includes investment in equity shares, corporate bonds, company debentures, deposits commercial papers etc. This allocation of asset differs from scheme to scheme which can fit everyones risk appetite.

Due to plethora of investment options ranging from debt funds to equity funds, mutual funds have been successful in diversifying the risk based on one’s risk appetite. But when it comes to investment in mutual funds, the investors usually feel that mutual funds have only two significane i.e. Lumpsum Investment and SIP.  However they are unaware that they can plan their complete retirement planning with the help of Unsung Trio of SIP, STP and SWP.

Let’s fly the journey of financial planning from teenage to retirement with the help of a story:

After completing his high schooling, Mr Rahul, a 22 years old teenager secured a job in banking industry. He is very diligent about his financial planning and decides to invest Rs. 1,000/- per month in Axis Bluechip Fund (G) from the first day of his job. As his income started to rise, he increased his investment value more by Rs. 1,000/- per month after every 5 years. He did this investment for 30 years. This is known as Systematic Investment Plan (SIP) with top-up.

What is SIP?

SIP is a facility offered by mutual funds to the investors to invest in a disciplined manner. The plan refers to making equal investment at regular interval of time in a particular asset. The regular interval can be quarterly, monthly, weekly or evenly daily. One can even start investing in SIP with as low as Rs. 500/- per month.

So after 30 years his portfolio value from the SIP investment is as under:

Thus his slow and steady investment strategy helped him win the race by creating a handsome corpus.

As Mr Rahul was stepping the ladder of success, he earned various incentives and bonus which led to cumulative inflow of Rs. 1,30,000/- after every 5 years respectively. Instead of directly investing in equity schemes, he decided to invest this whole amount in debt scheme and started Systematic Transfer Plan in an equity scheme.

What is STP? STP stands for Systematic Transfer Plan. It is an automated way of transferring money from one mutual fund to another. This plan is chosen when one wants to invest a lump sum amount and also wants to avoid market timing risk. So the most common practice is transferring money from debt fund to equity fund.

So he invested whole Rs. 1,30,000/- in Axis Short Term Fund (a debt scheme) and started STP of Rs 2,500/- in Axis Bluechip Fund (an equity scheme).

So after 30 years his portfolio value from this arrangement of STP is as under:

 For 30 years, i.e. till the age of 52 years he invested his income systematically via SIP and STP which led to a portfolio of Rs. 84,28,550/- (50,83,825+33,44,725) and now i.e. at the age of 52 years, he is very relaxed for his retirement. Considering that Mr Rahul is having life expectancy of 78 years so he started an SWP of Rs. 75,000/- per month in his savings bank a/c for his living.

What is SWP? SWP stands for Systematic Withdrawal Plan. It is a facility extended to investors whereby they can withdraw a fixed sum weekly, monthly or quarterly. Apart from SWP, one can also withdraw the amount in lump sum during emergency needs. As the need arises, one can also withdraw lump sum amount.

During retirement, the calculation of SWP is as follows:   

  Even after withdrawing 75,000/- per month for 25 years (i.e. till the age of 78 years), he is left with wealth of Rs. 12,70,203/-.

The above calculation proves the Power of Compounding and his discipline, patience and right investment strategy helped him to achieve his financial goals.

To Conclude:

Your Parents are not your Emergency funds and your Children are not your Retirement Fund, build your own wealth. From your teenage only start your financial planning so that you don’t fall prey to lack of money during your retirement. From the above blog it can be proved that small small savings can help you to build wealth in long term. No one has grown rich by just parking their funds in savings account. You need to take a step further and start with an SIP or if you are having lumpsum amount then invest in debt fund and start STP from it. A goal without a plan is just a wish, so build your own roadmap for your destiny.    

Keep sharing, Keep gaining.

By CA Dhruval Shah