The twin strategy of SIP and SWP is suitable for people who are looking for a fixed flow of income for meeting their monthly financial requirements. The twin approach can help you to meet various short-term and long-term monetary needs of yours and family members like financing higher education, paying equated monthly installment (EMI) for consumer durables, house renovation, dealing with medical emergencies, meeting unexpected employment situation, post retirement earnings, and others.
Investing in SIP is best advised for accomplishing financial objectives over a period of time, because when an investor attempts to time the market, he usually misses out on the rally or enters the market at the wrong time – either the valuations have peaked or the markets are on the verge of declining. Investing every month ensures that one is invested during the peaks and valleys of the market.
SWP gives you the potential to earn more returns over a period, as you withdraw happiness bit by bit. It allows the investor a certain level of independence from market instability and helps in avoiding market timing. The investor can use the redeemed amount as a source of regular income, through a tax-efficient way while making inflation beating returns.
Let’s take an interesting example of approaching the twin strategy of SIP and SWP in meeting financial goals.
– An individual investor had a SIP of Rs 20,000 per month in a diversified equity mutual fund, which he was investing for past 10 years, this facilitated him to accumulate a strong corpus of Rs 55.73 lakh (assuming 15 percent rate of return).
– He decided to take one-year of sabbatical due to unavoidable circumstances in his employment. He needed Rs 30,000 a month to meet his overhead expenses and other financial commitments.
– After the individual investor withdrew Rs 30,000 per month, over the period of twelve months amounting Rs 3.60 lakh, his portfolio value should have come down to Rs 52.13 lakh, from Rs 55.73 lakh earlier, however, due to power of compounding earnings, the effective value of mutual fund portfolio stood at Rs 59.95 lakh (assuming 15 percent rate of return). The device of SWP, when properly used, can support a flexible and tax efficient way of maintaining a corpus while enjoying a predictable cash flow as compared to other conventional medium of investments.