How SIPs can help you attain financial freedom

In the current market euphoria, it is very easy to get carried away by the returns that were experienced in the last few quarters. Equity investments are always associated with volatility and one has to understand that it's a feature but not a bug. The only way to counter this is to give time, the time spent in the market not only enriches the returns but also dissolves the risk. The current rally has attracted a fresh load of investors and it's good to see their success but hope the rationalize their expectations.

Even as the economy grows and prosperity increases across the population, many don't acknowledge the need for planning their retired life. With scant social security and increasing trend of atomic family, it's critical for the investors to have a plan for their nest-egg years. Of course, there are multiple ways to achieve and in fact an optimal mix of investments would yield better post-tax returns that would suffice the need.

Most of us know the role of mutual funds in wealth creation and especially those of the equity oriented. And using a systematic investment plan (SIP) one could take advantage of the volatility by cost averaging. Also, it's a highly convenient way to invest in small amounts and over a long period of time, huge corpuses could be built due to the compounding effect. Lower capital gains taxation on the long term is an added advantage to the investor.

In the west, target date funds are available in the form of MF or ETF (Exchange Traded Funds). What they do is target a predetermined period (for example, year 2040) and accordingly rebalance the portfolio of the fund periodically to achieve better risk-adjusted returns. The fund profile gradually changes to conservative as the target date (or year) approaches while taking an aggressive stand during the early period of investment contribution. This allows one to opt for an auto-pilot mode of investment and brings the convenience of periodic contributions.

This is like the life-cycle fund option in the NPS (National Pension Scheme) where the fund's asset allocation changes (equity portion reduces) as the age of the investor increases. This reduces the risk associated with the equity exposure while bringing predictability to the investment as the retirement date approaches. The periodic rebalance of portfolio allows the investors to generate steady growth over the long periods.

To bring this facility to our already habituated investment avenue of MF, ICICI Prudential MF has launched 'Freedom SIP' which allows the investor to contribute monthly and a multiple of that amount could be withdrawn post the targeted time (no. of years). The feature allows investor to use SWP (Systematic Withdrawal Plan) at the distribution phase, an amount pre-defined at the time of contribution.

Contributions could be sourced from a wide range of about 26 schemes including those of index and hybrid funds to create a corpus. At the distribution phase, the corpus is moved to any of the 6 targeted hybrid schemes where SWP option is applied for a non-intervention withdrawal. The choice of tenure for contribution starts as low as 8 years, extending through 30 years. The corresponding SWP amount is 1.5 times and 12 times for contributions of 10 years and 30 years respectively. This option gives the best of both the worlds where the convenience of SIP is built-in with an income flow in the retired years.

Though this feature requires commitment from the investors on the agreed upon tenures, liquidity is always available. Also, there's no penalty in case of discontinuation but the SWP feature can't be built automatically. However, in such times, the investor could treat them like any of the MF investments and possibly retain the corpus to participate in the market. The targeted SWP mayn't be achieved but still could create a larger corpus over a long time. There is no need for any additional documentation but check a mere option to put the desired contributions along with the period of contribution. Investors could club this feature along with other options to arrive at the required retirement inflow.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])