SIP through STP vs Lump Sum: Have large amount to invest? Which option you may select? Know expert view

Even for a hard-core analyst, it is impossible to time market. So, when we talk about investing in mutual funds, we can never predict whether our investments in a rising market will continue their rally for a long period of time. To negate this effect, experts suggest investing through a Systematic Investment Plan (SIP), where the rupee cost average helps your investments fight market fluctuations. The benefit of SIP investment is that even if you invest a small amount monthly for long durations, such as 15 years or above, you can build a huge corpus. But an investor may face a dilemma when they have a large amount to invest.

A lump sum investment in a mutual fund(s) is one way to park your money, but there is always a fear that your investments may deplete in value if the market is down at the time of withdrawal.

Investing the entire money in a debt fund may lower your gains, plus the income is taxed as per your tax slab.

So, what is one of the best possible ways to invest a large amount to get the maximum benefit from your investment? 

Shaily Gang, Head-Products, Tata Asset Management, has advice for such investors.

She says that the best way to make the most of a large amount through mutual fund investment is to invest it through SIP via the Systematic Transfer Plan (STP) and then withdraw the corpus through the Systematic Withdrawal Plan (SWP). 

Shaily says, "Wealth creation happens when capital is invested in a systematic manner vide SIPs or STPs into equity funds or even hybrid category funds and gets compounded over the phase where the individual is earning an income or accumulating wealth. During the harvesting phase or post-retirement, when there is a need for regular cash flows by the individual, SWP works very well." 

To put it into perspective, if you have Rs 10 lakh, you are parking that fund in a STP fund for 10 years, expecting a seven per cent annualised return on that, and you are transferring this money through STP into SIP in 120 equal monthly installments.

If you get a 12 per cent return on SIP investments in these 10 years, you can build an estimated corpus of Rs 35,07,017.

Now, if, after 10 years, you don't need this money in one go, you can withdraw it, pay a 10 per cent capital gains tax on it, which will be about Rs 3,40,702, and put the rest of Rs 31,66,315 in a mutual fund and start a SWP.

If you get an eight per cent return on this amount, you can withdraw a Rs 38,000 monthly pension for 10 years.

Even after withdrawing that amount, you will have Rs 29,785 in balance.

Which means your grand total of the pension amount and the balance will be Rs 45,89,785. So, your Rs 10,00,000 will become Rs 45,89,785 even with modest returns.  

"One of the objectives of investors is to generate cash flows with lower taxation impact on the cash flows. Thus SWP became popular as they generate regular cash flows and lower tax outflows as the withdrawals combine capital invested and the gains both. However, as capital is withdrawn, it interferes with the compounding of wealth. Thus, SWP is not a great feature during the accumulation phase if the objective is to build wealth. But the SWP or withdrawal tranche, is more tax-efficient than dividends," says Shaily.

Union Budget 2020-21 has announced the abolition of Dividend Distribution Tax and has moved taxation of dividends at the hands of the investors at the marginal rate of tax as per the income slab of the investor.