Uthman is keen to learn how to drive and steering the car in the reverse gear is quite challenging for someone like him who’s still in the process of learning the basic skills of driving. But it’s undeniable that in order to master driving, he must also learn the skill of moving the car backwards. Being a student of finance, I couldn’t help but relate Uthman’s driving to Investing through Systematic Investment Plans (SIPs). Let’s try and understand this with the help of an example – Suppose you are investing towards a long-term goal through SIPs – Wow Great and if you want to realise your goal most efficiently, investing through SIPs alone isn’t enough, you ought to have a withdrawal plan in place as well. A withdrawal plan – what does that mean and why can’t you just sell off your investment as soon as you arrive at your long-term goal such as your kid’s college education etc. Before I answer this question, let me remind you that you will never, ALWAYS BE MOTIVATED, so you must learn to be disciplined. Infact, you could do so if the market guaranteed it to you that it won’t shave off a few percentage points from your accumulated returns. Markets, as we know them, can be volatile. This volatility could hit you just when you don’t want it to. Hence, there is a need for a withdrawal plan.
Begin with the end in mind and remember every exit is an entrance somewhere else. Simply put, this ‘withdrawal’ plan is nothing but an SIP from an equity fund to a more conservative fund. When you move money between two funds systematically, that’s called a systematic transfer plan (STP). Since this STP is meant to protect your accumulated corpus, it should move the corpus accumulated in an equity fund to a more conservative fund, generally a short-duration debt or a liquid fund. Let’s say you are accumulating corpus for your Child’s higher education. For that, you are investing in a good diversified equity fund through SIPs. Around 12-18 months before you are going to need the corpus, you should start moving the accumulated sum to a short-duration debt fund. Since this type of fund is largely stable, you can expect it to preserve your capital till the time you actually need it, of course with its normal 6-7 per cent returns as well.
Another important goal can be your annuity or retirement, where you don’t need the retirement corpus all at once. In such a scenario, focus should be on the income part first as the money that you are going to need in the next year or so can be moved to a short-duration fund through an STP. This money will serve your regular-income requirements. Second, focus on beating inflation. In order to do that, park the rest of your retirement corpus in a couple of good aggressive hybrid funds, again through an STP. Aggressive hybrid funds have 65-80 per cent equity allocation, with the rest parked in debt. They provide equity-like returns at comparatively lower volatility and hence are ideal for most retirees. After every couple of years, move funds from aggressive hybrid funds to short-duration debt funds through STPs. However you need to keep in mind that when you set up an STP, both the sending and receiving funds must be from the same Asset Management company (AMC) or Fund House. Professional advice from your financial advisor always comes in handy and ensures no confusions regarding the transfers or choice of funds, as sometimes the smallest choices or decisions in life can lead to biggest influences, so CHOOSE TO SHINE.
(Ifthikar Bashir is a freelance Financial Advisor)