Exits are Important too

Uthman is keen to learn how to drive and steering the car inthe reverse gear is quite challenging for someone like him who’s still in theprocess of learning the basic skills of driving. But it’s undeniable that inorder to master driving, he must also learn the skill of moving the carbackwards. Being a student of finance, I couldn’t help but relate Uthman’sdriving to Investing through Systematic Investment Plans (SIPs). Let’s try andunderstand this with the help of an example – Suppose you are investing towardsa long-term goal through SIPs – Wow Great and if you want to realise your goalmost efficiently, investing through SIPs alone isn’t enough, you ought to havea withdrawal plan in place as well. A withdrawal plan – what does that mean andwhy can’t you just sell off your investment as soon as you arrive at yourlong-term goal such as your kid’s college education etc. Before I answer thisquestion, let me remind you that you will never, ALWAYS BE MOTIVATED, so youmust learn to be disciplined. Infact, you could do so if the market guaranteedit to you that it won’t shave off a few percentage points from your accumulatedreturns. Markets, as we know them, can be volatile. This volatility could hityou just when you don’t want it to. Hence, there is a need for a withdrawalplan.

Begin with the end in mind and remember every exit is anentrance somewhere else. Simply put, this ‘withdrawal’ plan is nothing but anSIP from an equity fund to a more conservative fund. When you move moneybetween two funds systematically, that’s called a systematic transfer plan(STP). Since this STP is meant to protect your accumulated corpus, it shouldmove 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 accumulatingcorpus for your Child’s higher education. For that, you are investing in a gooddiversified equity fund through SIPs. Around 12-18 months before you are goingto need the corpus, you should start moving the accumulated sum to ashort-duration debt fund. Since this type of fund is largely stable, you canexpect it to preserve your capital till the time you actually need it, ofcourse 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 toneed in the next year or so can be moved to a short-duration fund through anSTP. This money will serve your regular-income requirements. Second, focus onbeating inflation. In order to do that, park the rest of your retirement corpusin a couple of good aggressive hybrid funds, again through an STP. Aggressivehybrid funds have 65-80 per cent equity allocation, with the rest parked indebt. They provide equity-like returns at comparatively lower volatility andhence are ideal for most retirees. After every couple of years, move funds fromaggressive hybrid funds to short-duration debt funds through STPs. However youneed to keep in mind that when you set up an STP, both the sending andreceiving funds must be from the same Asset Management company (AMC) or FundHouse. Professional advice from your financial advisor always comes in handyand ensures no confusions regarding the transfers or choice of funds, assometimes the smallest choices or decisions in life can lead to biggestinfluences, so CHOOSE TO SHINE.

(Ifthikar Bashir is a freelance Financial Advisor)

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