Making Financial Freedom a Reality

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The definition of financial freedom varies from person-to-person. Often it is defined as a stage in life when one has enough income and assets to cover expenses and goals without relying on traditional income sources. If well planned, an individual can use his/her investment to achieve financial freedom in a hassle free manner. And in this journey disciplined investments in instruments like mutual fund by way of SIP (Systematic Investment Plan) has an important role to play. Consistent investment in SIPs helps individuals work towards their financial goals, whether it is retirement planning or buying a home. However, many face challenges in transitioning their savings into consistent income. That is where solutions like Freedom SIP prove invaluable.

What is Freedom SIP? Freedom SIP is a unique combination of SIP and SWP (Systematic Withdrawal Plan). This feature enables investors to invest and withdraw funds in a structured and disciplined manner, promoting a staggered approach to financial management. In this combination, SIP allows compounding and rupee cost averaging to play out, while SWP facilitates systematic cash flows by automating withdrawals.

How does the strategy work? Freedom SIP can be described as a three step journey. In the first step, investors regularly invest a pre-defined sum every month via SIP in a scheme of their choice. This scheme is referred as the source scheme. Investors have the flexibility to select their SIP amount and tenure from a range of options, including 8 years, 10 years, 12 years, 15 years, 20 years, 25 years, or 30 years. Given the long term nature of the investment, investors can consider an equity fund as their source scheme. In this arrangement, some fund house offer investor the flexibility to top-up the SIP amount i.e. increase their SIP contributions on periodic basis.

Once the SIP tenure is over, the corpus created is transferred to a target scheme. Investors have the option of selecting the target scheme. The aim of this scheme is to act as a holding account. Hence, this fund should ideally be of lesser risk such as a debt or a hybrid scheme such that the corpus is not exposed to equity market volatility. Aggressive investors can consider maintaining both the source and the target scheme as the same equity scheme chosen for SIP. It is from this target scheme, SWP is initiated.

The investor can mention the monthly SWP amount desired at the time of signing up for Freedom SIP. If no specific amount is specified, a default SWP will be disbursed monthly. The SWP amount will vary basis the tenure of SIP. For example: If an invested had invested Rs. 10,000 in a monthly SIP for a decade, the default SWP amount is Rs. 15,000. Extend the duration of investment for 15 years, then the SWP amount will stand at Rs. 30,000. In this manner, SWP will continue until units are depleted in the target scheme.

What are the benefits of Freedom SIP?

The automated nature of both SIP and SWP that this feature offers is a win-win for the investor. This arrangement ensures that investors stay mindfully invested over the long term, without having to think about making an investment actively. Similarly, even when it comes to SWP, investors automatically receive a particular sum of money every month, thereby ensuring there is a fixed stream of cash flow coming in every month without an investor having to think about redemption. This automated approach ensures that the investment corpus is not under on the onslaught of greed and fear, two of the biggest vices when it comes to investing. Investors can consider using this arrangement for their retirement fund.

Another advantage is the flexibility the setup offers. Basis one’s risk appetite and goal, the investor can choose the source, target scheme, SIP and SWP amount and frequency. Once all of these have been decided and filled in, the rest is taken care by the fund house in a methodical manner. The entire arrangement is also tax efficient in nature.

To conclude, if you are an investor looking for a hands free approach to achieving long term goals such as retirement, then utilising features such as Freedom SIP can be a good starting point.