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There is always a concern about retirement in the minds of working people and middle class families that what will be the source of regular income after losing the job or after the age of 60. In this era of declining interest rates in traditional savings schemes, fixed deposits (FD) and PPF and ever-increasing inflation, merely saving is no longer enough. In today’s financial era, there is a need for ‘smart and disciplined investment’.
Systematic Investment Plan i.e. SIP in Mutual Funds has emerged as a tool which has made the path of becoming a millionaire easier for the common man. If you start investing at an early age with just a small amount of ₹6,000 every month, the power of compounding (compound interest), called the ‘eighth wonder of the world’ by Albert Einstein, can create a huge corpus of more than ₹9 crore in your bank account at the time of retirement. Not only this, from this fund you can also get a regular monthly pension of ₹ 6 lakh every month throughout your life.
Gamechanger formula of step-up SIP: How 10% compound annual growth builds a fund of ₹9 crore?
People often wonder how a fund of ₹9 crore can be created by depositing only ₹6,000 per month? The simple and practical answer is – ‘Step-Up SIP’ or Top-up SIP. When your income increases every year, your investments should also increase in the same proportion.
Suppose you are 25 years old and you aim to retire at the age of 60, i.e. you have a long time of full 35 years to invest:
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Initial Monthly Investment: ₹6,000 per month
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Annual Step-Up: 10% (i.e. every year you have to increase your monthly SIP by only 10%. ₹ 6,000/month in the first year, ₹ 6,600/month in the 2nd year, ₹ 7,260/month in the 3rd year etc.)
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Estimated Annual Return (CAGR): 12% (The historical average for Indian equity mutual funds has been between 12% to 15%)
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Total investment period: 35 years (age 25 to 60 years)
Complete Mathematics of Calculation: The total investment from your pocket under this step-up formula over 35 years will be approximately ₹1.95 crore. At a compound rate of 12%, you will get an estimated interest/return of approximately ₹ 7.22 crore on this investment. Thus, your total maturity fund at the age of 60 will be approximately ₹9.17 crore (Approximately ₹ 9,17,00,000). If your portfolio gives returns of 13% or 14%, this figure can even cross ₹12 to ₹15 crore.
Pension of ₹6 lakh per month from ₹9 crore fund: Understand the magical blueprint of SWP
When you have accumulated a retirement fund of ₹ 9 crore at the age of 60, you do not need to withdraw the entire amount at once and keep it in the bank. This is where mutual funds’ most popular tool comes in handy—the Systematic Withdrawal Plan (SWP).
Under SWP, you transfer your corpus of ₹9 crore to a safe hybrid fund, balanced advantage fund or multi-asset allocation fund, where the fund continues to generate an average safe annual return of 8%.
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Total Retirement Fund: ₹9,00,00,000 (₹9 crore)
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Monthly Pension (SWP Withdrawal): ₹6,00,000 per month (₹72 lakh annually)
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Withdrawal Rate: 8% (₹72 lakh ÷ ₹9 crore = 8%)
If your remaining fund keeps growing even at a simple annual rate of 8%, you will continue to withdraw a pension of ₹6 lakh every month without any interruption and your original corpus of ₹9 crore will never decrease but will remain stable. This means that you will live your retirement life with dignity and your entire wealth of ₹9 crore will remain safe as inheritance for your nominee or children.
Choosing the right mutual fund portfolio: Balanced formula of large, flexi and midcap
To get better and stable returns over a long journey of 35 years, it is wise to spread your monthly investment of ₹6,000 across a diversified portfolio instead of allocating it in a single fund:
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Large Cap/Index Fund (40% – ₹2,400): Invest in Nifty 50 or Sensex index funds. It invests money in the top 50 blue chip companies of the country, providing stability and low risk to your portfolio.
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Flexi Cap Fund (30% – ₹1,800): Flexi cap funds give the fund manager the freedom to invest in large, mid and small caps as per market conditions, thereby maintaining a balance of risk and return.
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Mid Cap/Small Cap Fund (30% – ₹1,800): Mid and small cap funds have the highest growth potential over the long term. Over a 30-35 year perspective, these funds have the potential to increase your overall portfolio returns from 12% to 14-15%.
How to deal with inflation and tax burden? Long-Term Capital Gains (LTCG) rule
It is important to keep taxes and inflation in mind while doing financial planning. Equity mutual funds in India are subject to Long Term Capital Gains (LTCG) tax at the rate of 12.5% on annual profits above Rs 1.25 lakh.
But the biggest beauty of SWP is its tax-efficiency. When you withdraw interest from fixed deposits, it is taxed as per your income tax slab (up to 30%). Whereas in SWP, out of ₹ 6 lakh withdrawn every month, only the profit portion is subject to a nominal tax of 12.5%, there is no tax on the principal amount. Due to this, the post-tax returns from SWP are much higher than FD or annuity pension plans.
Avoid these 4 most common mistakes while starting SIP
Often investors make some basic mistakes in long-term investing, due to which their dream of wealth creation remains unfulfilled:
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Closing SIP in market fall: When the stock market falls (Bear Market), do not panic and stop SIP. During recession, you get more units of the fund at cheaper rates for the same ₹ 6,000, which give huge profits as soon as the market improves.
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Delay in starting: The best friend of compounding is ‘time’. If you start investing at the age of 35 instead of 25, you will have to do monthly SIPs of more than ₹25,000 instead of ₹6,000 to build a corpus of ₹9 crore.
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Walking without step-ups: If you do not increase your SIP by 10% every year and keep depositing only ₹6,000 for 35 years, your total corpus at 12% returns will be only ₹3.89 crore. A 10% step-up is mandatory for the target of ₹9 crore.
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Withdrawal of retirement fund in emergency: Keep this SIP portfolio of yours reserved only for your old age and pension. Maintain an emergency fund (in liquid fund or FD) of 6 months of expenses separately for medical or other immediate needs.
Financial freedom is not achieved by any miracle, but by taking right decisions on time and constant discipline. Your small expenditure of ₹ 6,000 saved today can become the strongest support for your old age tomorrow. Assess your risk appetite by seeking advice from any SEBI registered mutual fund distributor or Certified Financial Planner (CFP) and start your first SIP without delay.