Financial freedom means different things to different people. Achieving this elusive financial freedom is a dream for many. However, what many people fail to appreciate is that this ambition is achievable if a proper mix of financial instruments is used for meeting various financial goals spread out over one’s lifetime. For example, creating a sizeable kitty for one’s retirement years.
Many people achieve this goal by using the Systematic Investment Plan (SIP). However, after creating the corpus, they falter in converting this money into a steady stream of income. This is when a feature by the name of Freedom SIP comes in handy.
Understanding Freedom SIP
Freedom SIP combines the benefits of SIP and a Systematic Withdrawal Plan (SWP) under one umbrella. Similar to SIP, where you invest a specific amount regularly, SWP allows you to redeem a specific amount at regular intervals.
With Freedom SIP, you can build your target amount by investing in a mutual fund of your choice through SIP. This fund is called the ‘source scheme’. You can choose a SIP amount and the SIP tenure of 8 years, 10 years, 12 years, 15 years, 20 years, 25 years or 30 years.
Typically, the source scheme is an equity fund, as equity as an asset class can help your money grow over time. Also, regular investments through SIP average out the investment cost in the long run.
Next, select your target scheme. This is the fund to which the accumulated SIP units will be transferred for the SWP to take effect. Here, the ideal approach is to choose either a debt or a hybrid scheme, so that money accumulated is not exposed to market fluctuations. At the same time, you have the option to maintain the same fund as the source and target schemes. In such a case, there will be no need for a transfer.
Then, from this ‘target scheme’, SWP will be activated. If an amount is not specified then a default SWP will be paid out every month. The SWP will continue until December 2099 or until units are available in the target scheme.
Benefits of Freedom SIP
1. Goal-based financial planning: Freedom SIP facilitates goal-based investment planning by expertly combining SIP and SWP. This approach automates your investments and redemptions, effectively helping you reach your financial goals. Whether it is funding your children's education or planning for retirement, you can structure your investment plan with SIP and SWP, ensuring you achieve your goals efficiently.
2. Helps you stay invested in the long run: Taking a long-term approach is crucial for goals like retirement planning, which requires disciplined investment over decades to enjoy a comfortable retirement life. Hence, it is essential to start investing early and staying committed.
However, it is easier said than done. During the investment process, you might be tempted to redeem your funds marked for retirement for other purposes or stop investing during a volatile phase in the market in a bid to protect the capital, which is a detrimental approach. Freedom SIP helps you to stay invested in the long term by discouraging premature withdrawals, given that the minimum SIP tenure is set at eight years.
3. Flexible investment tenure: If you require more than eight years to accumulate your desired goal amount, Freedom SIP offers the flexibility to choose from SIP tenures of 10, 12, 15, 20, 25, and 30 years.
4. Freedom to choose source and target schemes: With Freedom SIP, you have the freedom to select your source and target schemes based on your risk appetite and goal requirements. For instance, if you have a higher risk appetite, you could opt for an equity fund as your source and target scheme. On the other hand, if you desire lower risks during the pay-out phase, you can choose an equity fund as your source scheme and a debt/hybrid fund as your target scheme.
To conclude, Freedom SIP provides an excellent opportunity to achieve one’s financial goals while securing a regular source of income. By choosing your SIP amount, investment tenure, source and target schemes, and SWP amount, you are paving the way to financial freedom. However, patience is of the essence in this journey.
Note: This is a partnered post by Tuhin Jana, Mutual Fund Distributor. The views and opinions expressed in this article are personal and do not reflect that of CNBC-TV18 or its affiliates.
