SIP+SWP: Start with 5K SIP and then get Rs 93.80K pension for 30 years; know calculations

Slow and steady wins the race. This proverb, based on the tale of a tortoise and a hare, holds true for investment as well. In investment, duration matters a lot, specially in investment avenues offering compound interest or returns. In such investment options, you see that a small investment done in the long run can help you build a larger corpus than a big investment done in the short term. E.g., a Rs 2,000 investment in a mutual fund through SIP at a 12 per cent annual return will give Rs 4.60 lakh in 10 years. But a Rs 4,000 SIP with a 12 per cent return will give you just Rs 3.30 lakh in five years, even though the total investment amount is the same (Rs 2.40 lakh).

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If you apply the same formula to your retirement planning and start investing early, then with just Rs 5,000 SIP a month, you can create a corpus of Rs 1.77 crore at 55 if you get an annual return of 12 per cent on your investment.

What is more interesting is that the corpus of Rs 1.77 crore invested through a systematic investment plan (SWP) in a mutual fund(s) can help you get a Rs 93,800 monthly pension for 30 years in a row, even if you get just a five per cent return on that corpus.

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Through calculations, we will tell you how it is possible. Before that, know how SIP and SWP work.

How SIP works

In SIP, you invest a fixed amount, daily, weekly, monthly, tri-monthly, or half-yearly, in a mutual fund scheme.

With that amount, you purchase net asset values (NAVs), which are also known as units.

The basic advantage of SIP investment is that you don't have to time market.

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When the market is high and the NAV price is high, you purchase fewer NAVs; when the market is low and the NAV price is also low, the investor buys more NAVs.

Thus, it helps in rupee cost averaging in the long run. 

How SWP works

SWP is just opposite SIP. In SWP, instead of depositing, you withdraw a fixed pension every predecided cycle.

In SWP, you invest a lump sum amount in a mutual fund.

The fund house sells NAVs of a fixed amount every withdrawal cycle from your investment and deposits it in your account.

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So, if the market is low and the NAV rate is also low, the fund house will sell more units.

In contrast, if the market is high and the NAV rate is also high, the fund house will sell less.

Here, the catch is that if the fund house is selling your NAVs every month, won't your corpus be depleted?

Or, if the mutual fund in which you have invested your money gives a negative performance, will your pension be stopped?

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Your corpus can be depleted if the fund is selling your NAVs every month.

But you can negate that effect by withdrawing a lesser percentage than the return you get on your investment.

The fund house doesn't stop your pension even if your fund's performance turns negative.

However, the fund can be depleted.

To avoid that situation, you can pick ultra conservative debt funds, where chances of turning fund negative are minimal. 

How SIP and SWP in tandem can benefit?

Both are separate products and can't be intermingled.

But you can use both products separately to your benefit.

SIP may help you build a huge corpus in the long run.

On the other hand, SWP, used in a smart way, can ensure you a huge monthly pension for your old age.

"The SIP should be used to take risks and invest small sums of money in equity funds. Then the corpus so created should be invested in a liquid or money market fund to pay out monthly pensions via SWPs for your post-retirement life," said Nehal Mota, Co-Founder and CEO, Finnovate. 

How to get Rs 93,800 monthly pension starting with Rs 5,000 SIP?

For that, you need to be an early starter in your investment journey.

If you start investing at 25, you need to make a Rs 5,000 SIP(s) in a mutual fund(s).

If you get a 12 per cent return on your investment, then here is how your corpus will be after 10, 20, and 30 years.

Chart Courtesy: Finnovate

In 10 years, a Rs 5,000 SIP with a 12 per cent return will give you Rs 11.62 lakh on a Rs 6.0 lakh investment.

In 20 years, the same SIP and the same rate of return will give you Rs 49.96 lakh on a Rs 12 lakh investment.

In 20 years, the same SIP and the same rate of return will help you get Rs 1.77 crore on a Rs 18 lakh investment.

Such exponential growth is possible because you get a compound return on your SIP investment.

It means that after 30 years of investment, you will have a Rs 1.77 crore corpus at the age of 55.

If you invest this amount in a debt mutual fund(s), where you get a modest return of five per cent annually, you can get a Rs 93,800 pension for 30 years. 

It is important to remember that the longer your SIP investment is, the higher your monthly pension can be.

E.g., if your investment was for just 20 years and your corpus was approximately Rs 50 lakh, you would have got Rs 45,000 monthly pension at a five per cent annual return, and that too for just 12 years.