Payal, a 28-year-old entrepreneur is the owner of 3 fashion boutiques in Mumbai. She started her financial journey by making small investments in mutual funds through the SIPs (Systematic Investment Plans) in mutual funds. She envisioned achieving her life goals, which were:
Being a financially independent person, a businesswoman, she always believed in doing thorough research.
Payal started SIPs totally to Rs 21,000 per month in diversified equity mutual funds for 5 years. This eventually helped her build a corpus of Rs 19 lakh (clocking a 15% rate of return). So, to speak, every drop made an ocean. She invested some of this money in her business.
But in another few years she was on a two-year sabbatical immediately after her pregnancy. At first, she thought of liquidating her funds and deposit the same in her savings account. She needed Rs 20,000 a month to meet her overhead expenses and other commitment.
But instead of choosing this conservative way, her Certified Financial Guardian prudently suggested her to take the Systematic Withdrawal Plan (SWP) route. This helped her receive the determined sum to meet her expenses, plus allow the remaining investment amount to grow.
SWP facilitates you, the investor, to withdraw a fixed sum of money from a mutual fund scheme regularly (say monthly, quarterly, half-yearly and annually) and hold the potential to clock returns on the remaining investments over a period of time.
Both SIP and SWP have one thing in common: instils a disciplined approach. A SIP helps you save and invest in disciplined manner regularly, while a SWP enables you to systematically withdraw your money, whereby the remainder investment amount can grow, and rupee-cost averaging is facilitated.
Compounding and Rupee Cost Averaging
| Month |
Cashflows |
NAV |
Fund Units |
Value |
| Jan-16 |
19,00,000 |
100 |
19,000 |
19,00,000 |
| Feb-16 |
-20,000 |
103 |
18,806 |
1,937,000 |
| Mar-16 |
-20,000 |
102 |
18,610 |
1,898,194 |
| Apr-16 |
-20,000 |
105 |
18,419 |
1,934,023 |
| May-16 |
-20,000 |
108 |
18,234 |
1,969,281 |
| June-16 |
-20,000 |
106 |
18,045 |
1,912,813 |
| July-16 |
-20,000 |
107 |
17,858 |
1,910,858 |
| Aug-16 |
-20,000 |
106 |
17,670 |
1,873,000 |
| Sept-16 |
-20,000 |
109 |
17,486 |
1,906,009 |
| Oct-16 |
-20,000 |
110 |
17,305 |
1,903,496 |
| And Nov-16 |
-20,000 |
108 |
17,119 |
1,848,887 |
| Dec-16 |
-20,000 |
107 |
16,932 |
1,811,767 |
| Jan-17 |
-20,000 |
106 |
16,744 |
1,774,835 |
Note: The above table is for illustration purpose only
(Source: PersonalFN Research)
When Payal withdrew Rs 20,000 over twelve months (a total of Rs 2,40,000), her effective portfolio would value was Rs 16,60,000.However, due to rupee cost averaging the total value of the portfolio is now Rs 17,74,835; effectively proving that mutual funds are a better avenue vis-à-vis traditional fixed deposits due to market dynamics.
And in case of SWP, you earn on the remainder even while you spend. Besides, it is tax efficient for you as an investor. Any gain on sale of equity mutual fund units held for less than 1 year attracts a short-term capital gains tax of 15%. However, under SWP since your withdrawals will be in a smaller amount, in the first year it will be your principal amount, and hence will not attract STCGT.
In case of debt funds, short term is defined as 3 years and any profit made within this duration is classified as a Short Term Capital Gain (STCG) and will be taxed as per your income-tax bracket (i.e. marginal rate of taxation). And Long Term Capital Gain (LTCG) i.e. investments held for a period of more than 3 years, at 20% tax rate with indexation.
But when you take the SIP route to invest and SWP to withdraw, pay attention to your asset allocation and timely monitor your portfolio…
- Asset Allocation
You see, different asset classes (equity, debt, gold) have different traits and thus defining the correct asset allocation is essential in the endeavour to achieve your financial goals. Asset allocation refers to slicing your portfolio into different asset classes viz. equity, debt, gold, real estate and so on, based upon your risk profile and the number of years left before a financial goal befalls.
- Track and Monitor your portfolio
Once the investment portfolio is set right based on your financial goals set out in the financial plan, monitoring and tracking of investment portfolio and goals at regular intervals (at least once a year) is must to confirm that you are on track to meet your objectives. Any changes in the income, expenses, retirement age etc. needs to be incorporated in the plan. Plus, make sure the plan meets your investment objectives in the changing market scenario.
To conclude…
SIP and SWP can aid you wisely plan out your investments and enable you to achieve your goals. You can benefit from the power of compounding and rupee cost averaging to make profits to your portfolio.
But when you buy and sell mutual funds for your investment portfolio, back it with thorough research, and no because your family, friends, mutual fund distributors / agents / relationship managers, or so-called experts on business channel say. Opt for unbiased mutual fund research services of an independent and mutual fund research house to power your recommendations – buy, hold, sell. Plus, structure your portfolio in lines with your risk profile and financial goals.
Payal’s investment portfolio seemed fairly diversified and in congruence to her risk appetite. Systematic financial planning was pivotal, whereby the focus was long-term; so she even continued with SIPs later to meet her other financial goals. But only a handful of people follow the right financial discipline while they aspire to reach new heights.
So, be a disciplined investor, responsible investor who is in complete control of his/her investment activity to scale the heights of financial success and achieve the financial goals envisioned.
Click here to use our SIP Calculator to calculate how much your SIP can potentially grow upto.
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