By Appu Subramoniam, Mutual Fund Distributor
In a fast-changing world where technology may render several jobs redundant, the comfort of generating consistent income in a corporate setting is gradually dimming. This rapidly changing scenario may cause serious repercussions for sustaining the current lifestyle in the future, and financial planning may turn topsy-turvy.
Imagine a senior manager at an IT company who expects to become a VP in the company over the next decade based on his or her skills and performance. Based on this, he/she is baking in more than a 10% CAGR salary hike and some ESOPs to cover his/her retirement corpus while maintaining his or her current lifestyle. However, owing to the technological disruption, his or her skills become antiquated, and the salary level starts to moderate.
This move creates a huge deficit between the expected fund value in case he/she serves the full term, and the money in hand, after the forced voluntary retirement. In this case, he/she will have to curb his/her expenditure but the pain arising out of this kind of transition can be limited if one has a secondary source of income. Proper financial planning using a unique systematic investment feature can help build the fund value, allowing one to live the dream life even after retirement without worrying about a shortfall in the kitty.
Let’s first understand the potential of SIP to reach your financial freedom! And the precondition for this is that you need to figure out the number of years you plan to retire in to enjoy your dream life. In layman's terms, financial freedom is building a secondary source of income to fulfil your passion, a kitty to roam overseas, a fund to meet your child's higher education commitment or even one's own retirement planning, without being dependent on the current source of income.
Let us assume two timelines of retirement from the current period: one is 10 years henceforth and the other 20 years. If one invests Rs 10,000 per month for 10 years, an annual return of 8% would translate into a fund value of Rs 18.12 lakh translating into a monthly income of Rs 15,000 after 10 years. Whereas if the term was 20 years, the monthly income inflow could reach as much as Rs 50,000.
Realizing the potential of SIP to secure secondary income, ICICI Prudential Mutual Fund has introduced a unique offering to reach your financial freedom through Freedom SIP. An investor can choose the SIP amount, the term of the SIP, a set of schemes called ‘source schemes’ to put and grow their money in and ‘target schemes’ where the money is deployed to generate the monthly pay-out at the end of the term, and lastly the amount of monthly withdrawal or SWP.
An investor has a wide variety of schemes to choose from when it comes to deciding on the source and target schemes. The idea of source schemes is to generate higher returns even with moderate risks and to build a big investment corpus in the long run. The aim of the target scheme is to hold the wealth created in a conservative fund, to maintain the certainty of earnings, and protect the investor from the vagaries of market turbulence.
The benefit of Freedom SIP can be gauged from the fact that a person who invested Rs 10,000 in the Nifty 500 total return index for 20 years in January 1995 was rewarded with a market value of Rs 1.59 core in January 2015, providing a monthly pay-out of Rs 50,000 through SWP till July 2023. Despite the pay-outs, the balance corpus stood at Rs 2.96 crore. If the same SIP was started with a 10-year tenure instead, with an SWP amount of Rs 15,000 per month, the corpus amount would still be standing at Rs 1.45 crore.
The benefit of Freedom SIP is that it magnifies with the amount invested as well as the tenure chosen. This means that a Rs 20,000 monthly freedom SIP with a term of 8 years can provide a consistent pay-out of Rs 20,000 through SWP, while a Rs 5,000 per month Freedom SIP with for 20 years can provide an investor Rs 25,000 pay-out via SWP after the term matures. The potential of wealth generation further accentuates if the SIP amount is topped up every year. A top-up of Rs 2,500 every year on a SIP of Rs 20,000 over a period of 20 years results in a fund value of Rs 2.75 crore, a gain of over Rs 1.2 crore as compared to a scenario where the SIP amount remained unchanged for the entire term period.