The other SIP-like tool for wealth creation you may not know about

By DK Aggarwal

There is an old adage: ‘The early bird gets the worm’. It certainly applies to investing to a great extent. There is a common misperception that investing is something you consider only when you are approaching retirement.

Understanding a financial instrument can be a big step in learning how to invest, knowing your path to retirement, or maximising the rate of return on your money.

History tells us if one starts investing at a young age, he/she would end up with far more than those who invest later in life. Investing at a young age is vital to the process of wealth creation.

There is a plethora of financial tools available in the market. A number of such financial products suit people from every age group. If you want to easily accumulate wealth and take advantage of the magic of compounding, it is important to start early and be consistent.

Investors looking to invest usually have two options – mutual funds or direct investing. Depending on requirement, investors can choose the right option. However, new investors with limited or no knowledge of financial markets can invest in mutual funds to create wealth in a relatively safe and systematic way.
Everyone knows about the systematic investment plan (SIP), which is very popular, but not many are aware of systematic withdrawal plan ( SWP), which is yet another innovative product. SIP is a smart and hassle-free mode for investing money in the stock market. People investing through SIP get the benefit of rupee-cost averaging and the power of compounding.

Rupee-cost averaging means money invested through SIPs fetches more units when stock prices are low and lesser when prices are high.

On the flip side, when the equity market has run up and one is not sure whether to stay invested or not, one can seek regular payoffs by signing up for a systematic withdrawal plan (SWP). It is also an excellent investment option for those who have lump sum amounts to invest.

Besides getting regular income, one would get the benefit of cost averaging and can save on taxes in the long term. In this plan, the investor can get a specific amount of payout at pre-determined intervals – monthly, quarterly, half-yearly or annually – as set by him/her.

This plan one can generate additional cash flow in an organised manner without the need to liquidate the entire investment. If we talk about the nature or type of withdrawals possible, investors normally have two options to choose from, withdrawal of a fixed amount or withdrawal of the appreciated amount. An SWP is an ideal tool for retirement planning for those who have retired or are on the verge of retirement.

To conclude, compounding returns are enormously powerful over a long term. This is the power of the time value of money. Regular investments in an investment portfolio or a retirement account can lead to huge compounding benefits.