What are the best ways to invest money?

Let me explain the best way to invest money in Mutual Fund:-

Q. I earn monthly salary and I want to invest my money with handsome returns. What is the
best way?

A. Systematic Investment Plan

Q. I have received ₹ 50 lakh on retirement which I want to invest such that I get monthly
income. What is the best way to invest?

A. Systematic Withdrawal Plan

Q. I have lump sum of ₹ 10 lakh which I want to invest. How should I invest with less risk?

A. Systematic Transfer Plan

Let’s take each strategy and understand with an example:

Case 1) Systematic Investment Plan (SIP):

This is the best strategy for income class people where a certain amount is invested
periodically in selected mutual fund.

How is it beneficial?

As we know that mutual fund invest money in stock market, the value of mutual fund (NAV)
varies based on market value of stocks in the portfolio. Now, suppose you put all your
money together, there is risk of market going down. Ideally, everyone wants to invest when
the market is down but nobody can time the market. Hence the best way is to average out
the purchase over time.

Example: Axis Long Term Equity Fund- Direct Growth

Lump Sum: If you had invest ₹ 60,000 in January then by June it would be at loss of ₹ 78.
This is because at that time, the NAV was 45.91 hence you bought 1306.9
units (₹60,000/45.91). But while selling in June, the NAV got reduced to 45.85 and hence
you earned ₹ 59,921 (Total Unit Purchased*NAV of 45.85). Final loss of ₹ 78.

SIP: However, SIP helped in reducing the average price to 44.6 which is less than final price
is June. You purchased total 1345.96 units (39.06 Units more than Lump Sum) at average
price of 44.46. While selling in June, the NAV became 45.85 and you earned ₹ 61,712 (Total
Unit Purchased * NAV of 45.85) and hence profit of ₹ 1,712.

Case 2) Systematic Withdrawal Plan (SWP)

Today, everyone understand that if you put your hard earned money in saving account, you
can’t even beat inflation. Now a person who has recently retired would look for a safer
option of investment. The person also want a monthly income.

The best investment option is debt mutual fund or hybrid mutual fund with maximum
exposure to debt.

Once you invest the money, you can set up SWP.

Example: Axis Liquid Fund- Direct Growth

Invested Amount on 1st Dec 2017 : ₹ 50,00,000

NAV: 1883

Total Units: 2655.33

Here, monthly withdrawal is set for ₹ 30,000. This withdraw the total units based on
current NAV. The final amount is the calculation of Final Units*NAV.

Please note that total of ₹ 2.4 lakh (30k * 8 months) has been withdrawn but
the final amount value is ₹ 49.96 lakh instead of ₹ 47.5 lakh. The reason is
because of returns received on the investment with increase in NAV.

Note: There are monthly income mutual funds as well which provide returns in form of
dividends but with recent changes, government has introduced 10% dividend distribution
tax on them and hence they are not very attractive now.

Case 3) Systematic Transfer Plan (STP)

One of my friend wanted to invest a lump sum amount of ₹ 20 lakh. he wanted to invest in
mutual fund but doubtful due to market volatility. I suggested him a strategy to invest the
amount in debt mutual fund and systematically transfer it into equity mutual fund. This is
called STP. It help in reducing the risk due to market volatility and one of the best strategy
to invest lump sum amount in mutual fund.

Example: STP from Axis Liquid Fund to Axis Long Term Equity Fund- Direct
Growth

Plan :Axis Liquid Fund- Direct

Investment Value: ₹ 20,00,000

Date: 01-Dec-15

NAV on 1st Dec 2015: 1636

Total Initial Units: 1222.49

After transferring ₹ 7,20,000, the final value of Liquid Fund is ₹ 15,64,405 with
a profit of ₹ 2,83,063.

Now, we have systematically transferred ₹ 30,000 every month from Axis Liquid Fund into
Axis Long Term Equity Fund- Direct Growth

With ₹ 7,20,000 investment in Axis Long Term Equity Fund, we purchased a

total of 20,568.8 Units. The investment value is ₹ 8,72,532 with profit of ₹
1,52,532.

Total Profit= ₹ 2,83,063 + ₹ 1,52,532= ₹4,36,937

Absolute Return= 21.8%

If the amount was only put in Axis liquid fund, the final investment value would have been
₹ 23,03,178. Hence we have got “extra” return of ₹ 1,33,759 with systematic transfer in
Axis Long Term Equity Fund in just 2 years.