Simplify your investment plan with Freedom SIP

The plan combines benefits of SIPs and systematic withdrawal plans

Akhileshwar Jha Akhileshwar Jha

A SIZEABLE NUMBER of retail investors have invested in mutual funds through systematic investment plans, also known as SIPs. At the start of 2021-22, the total number of SIPs in India was around 38 million; this increased to almost 54 million at the start of 2022-23―a growth of 53%. The Association of Mutual Funds (AMFI) in India estimates that by the end of September 2022, this number will have increased to over 58 million. This brings us to the question what makes people trust SIPs.

What is an SIP?

SIP enables investors to systematically invest money in a mutual fund scheme on a monthly, weekly or quarterly basis, depending on the investor’s cash flow. A monthly SIP would mean that the pre-decided amount would get debited from the bank account and get invested in the mutual fund scheme of one’s choice. This simplicity factor is one of the major attributes of SIP, which is very attractive from an investor point of view. SIP enables investors to make automatic, recurring investments of any size, even as little as Rs500. Given the automated nature of investments, the cycle will continue for decades without being disturbed by the emotions of greed and fear.

What follows an SIP?

The SIP feature would cause wealth to grow and accumulate over time. This advances us to the cycle’s next stage, namely withdrawal. When it is time to use the accumulated corpus, the market may be experiencing bearish or bullish trends. If the market is seeing a correction, it may be difficult to sell equity assets at this time. On the other hand, if the market is rising, your desire for more growth may prevent you from reaping the rewards of your self-control and patience over the previous few years.

In such a situation, the solution of withdrawing from the corpus generated is the exact opposite of SIP. Rather than withdrawing the entire accumulated corpus, you might consider withdrawing a fixed amount each month. In this scenario, the fund house will liquidate a portion of your investment to credit a set amount into your bank account each month. The remaining sum is still being invested and will increase in value over time.

The systematic withdrawal plan, or SWP, is the name given to this method of gradually liquidating mutual fund investments. This feature is best suited for long-term financial objectives like having a passive income during retirement, covering a child’s higher education expenses, and similar goals. You can continue to invest in SIPs till your retirement and then start an SWP to receive a regular income.

Make hassle-free financial planning a priority

Investors previously had to set up an SIP and SWP on their own. But as of late, fund houses have introduced features like the Freedom SIP, an optimised solution that combines the advantages of both SIP and SWP. ICICI Prudential Freedom SIP is one such feature.

In the SIP phase, the monthly SIP amount will be invested in a source scheme. Typically, a source scheme can be one of the equity or hybrid mutual fund schemes, intended to increase investments. For instance, as a target scheme for 20 years, you could choose to invest in a large-cap fund or a balanced advantage fund category scheme.

At the end of this period, the market value of the accumulated funds will be shifted to the investor’s chosen target scheme, which should ideally have a lower risk profile than the source scheme. It is from this scheme that the monthly withdrawals will be initiated. The beauty of the arrangement is the fact that the withdrawal amount will be a multiple of the SIP amount. The number of SIP years is used to determine the multiplier. For instance, if the monthly SIP amount is Rs10,000 for 10 years, then the SWP amount will be 1.5x the SIP amount, i.e., Rs15,000. Similarly, if the SIP duration is 15, 20, 25 and 30 years, the multiplier will be 3x, 5x, 8x and 12x respectively.

To conclude, discipline is the cornerstone of sound financial planning. By opting for features like the Freedom SIP, your investments are well on their way to achieving financial objectives without complications.

Akhileshwar Jha is director, G A Financial

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