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

Financial freedom is a dream any individual sees for himself. Everyone wants to achieve this dream, but due to a lack of knowledge and fear of downward risk, they fail to plan. This fear of failure makes them stick to investment in traditional instruments like fixed deposits and recurring deposits only. But, as Alan Lakein succinctly puts it -

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

Investors should come out of their comfort zone and explore new investment opportunities. One such opportunity is an investment in mutual funds.

Due to a 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 investing in mutual funds, investors usually feel that mutual funds have only two modes of investment i.e. Lump Sum Investment and SIP. 

However, they are unaware that they can plan their complete retirement planning with the help of the Unsung Trio of SIP, STP, and SWP.

How to plan your retirement during your teenage years?

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

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

What is SIP?

SIP is a facility offered by mutual funds to investors to invest in a disciplined manner. The plan refers to making equal investments at regular intervals of time in a particular asset. The regular interval can be quarterly, monthly, weekly or evenly daily. One can even start investing in SIP for 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 bonuses which led to a cumulative inflow of Rs. 1,30,000/- after every 5 years. Instead of directly investing in equity schemes, he decided to invest this whole amount in a debt scheme and started a 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 funds to equity funds.

So he invested the whole Rs. 1,30,000/- in Axis Short Term Fund (a debt scheme) and started an 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, 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 a life expectancy of 78 years, 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 a lump sum during emergency needs. As the need arises, one can also withdraw a 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 a wealth of Rs. 12,70,203/-. 

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

The Bottom Line

Your Parents are not your Emergency Funds and your Children are not your Retirement Funds, build your own wealth. From your teenage years itself, start your financial planning so that you don’t fall prey to a lack of money during your retirement.

From this blog, it can be proved that small savings can help you to build wealth in the long term. No one has grown rich by just parking their funds in savings accounts. You need to take a step further and start with an SIP or if you are having a lump sum amount, then invest in a 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.