Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs) and Systematic Transfer Plans (STPs) are terms you’ve probably come across while investing. We’ve covered SIPs and their benefits in another article. In this article, let’s look at its variants – SWPs and STPs and how they can be used.

What are Systematic Withdrawal Plans (SWPs)?

A Systematic Withdrawal Plan allows you to withdraw a fixed sum of money from a fund at regular intervals. This is deposited in your bank account. SWPs are opted for by people who want a steady flow of income over time e.g. retirees.

What are Systematic Transfer Plans (STPs)?

A Systematic Transfer Plan allows you to transfer a fixed sum of money from one fund to another within the same fund house. The investor chooses the fund from which the transfer is made, the fund to which the transfer is made, the STP amount, STP date and STP frequency (daily, weekly, monthly, quarterly).

STPs work between both debt and equity funds: debt to equity, and equity to debt. Scenarios where STPs are usually used are when:

• you have a lumpsum to invest, and you want to deploy it in equity – in this case, the lumpsum is first invested in a debt fund so it can earn a better than savings return, and a fixed sum is regularly transferred to equity for capital appreciation.
• you approach your goals – in this case, a chunk of investments in equity are moved to debt funds for capital protection while the money continues earning returns
• you want to rebalance your portfolio to match the asset allocation mix you’re comfortable with

Note: An STP is considered as a redemption from one fund and a fresh investment in another.

Taxation of STPs and SWPs

As STPs and SWPs involve redemption of units, capital gains taxes apply on them. Short-term capital gains tax on equity funds (15%) apply on holdings of less than a year, and on debt funds (tax-slab) apply on holdings of less than 3 years. Long-term capital gains tax on equity funds (10%) apply on holdings greater than a year and are exempt up to 1,00,000. Long-term capital gains tax applies on debt funds (20% with indexation benefit) with holdings of greater than 3 years.

Retirement is considered the ‘golden’ period of one’s life, and it could be – if you plan right for it. You’d need a sizeable corpus to retire comfortably, while maintaining the same lifestyle, or a better one. The first step is to plan, the second is to execute that plan.

We’d covered the golden rules of retirement in one of our earlier articles. We’ll now cover how to use mutual funds to plan for your retirement and what strategies to adopt.

As discussed in our earlier article, you’ll first need to estimate how much you will need when you retire. This will involve understanding your current expenses and savings, the age you expect to retire, your expected lifespan, inflation and the growth you expect from your investments. You’ll arrive at a required corpus for your retirement. A good retirement calculator can help you figure out how what your corpus will be after adjusting for inflation and how much you need to invest to build that corpus.

Let’s look at an example:

*assumed rate of return for equity mutual funds

The above calculations don’t consider any existing savings you may have but taking them into account will give you a better picture of how much you’ll need to invest. Also, do account for any other planned expenditures and emergencies while figuring out how much you would need when you retire. You can calculate your retirement needs here.

Once you figure out how much you need to invest, the next step is to set up your SIP.

Start a SIP

What investment strategy should you follow?

Your investment strategy depends on two factors – your age, and your ability to take risk, both interlinked. You’ll also have two needs – capital appreciation, and regular income.

You can start a SIP in equity funds for capital appreciation. The further away you are from retirement, your ability to invest in equity is higher. Periodically step-up your SIP to possibly reach your goal faster. You can also add lumpsum investments along the way to your corpus.

The closer you get to retirement, use Systematic Transfer Plans (STPs) to move into debt funds, and Systematic Withdrawal Plans (SWPs) for monthly withdrawals.

STPs can be used for moving investments from debt to equity and from equity to debt. In the case of retirement, or any goal, the closer you get to your goal, the lesser you’ll want your investments to be impacted by market volatility. Using an STP will move your money from equity to debt and give your portfolio the stability you need.

SWPs allow you to withdraw a fixed sum at regular intervals from your fund. This will give you a regular stream of income during retirement.

It would be prudent to transfer a lumpsum from your equity fund to debt using an STP, and to do an SWP from the debt fund to your bank account. Ensure you continue to have investments in equity, albeit a lower allocation, so there’s still room for capital appreciation, and you benefit from the best of both.

Mutual Funds Sahi Hai – you’ve probably seen or heard this phrase in some place or another – when you’re browsing the internet, driving through the city or even watching television. This article breaks down the 6Ws – well, 5Ws and 1H – what, why, when, who, where, and how, of mutual funds to help you get started with this product.

What is a mutual fund?

A mutual fund is an investment product that pools money from several participants (investors), and uses it to buy a variety of stocks, bonds, and other financial instruments. They are managed by fund managers. The aim of a mutual fund is to generate returns on the money invested, from the investments.

HOW does it work?

Consider this – you and your friends want to get an internet connection that costs 1250 a month. You have 250, your friend A has 500, another friend B has 300, and a third friend C has 200. Together, you can get the connection and so you pool the money to buy it.

Now, how is it decided who uses how much of the connection? Everyone has paid a different sum of money, and you can limit usage for each user depending on their contribution. So, each user will only benefit from what they’ve paid for.

That’s pretty much how mutual funds work too. If you and your friends together invest 1250 and the fund generates a return of 12% for the first year, your share of the return will be proportionate to your investment. Suppose, the money in the fund has increased to 1400 – a gain of 150, you’ll be entitled to 20% of the gain which is 30, while A, B and C make 60, 36 and 24 respectively based on what they’ve invested.

WHY should you invest in mutual funds?

Before I tell you why you should invest in mutual funds, let me tell you why you should be investing in the first place. Your savings aren’t really earning anything at 4%, with inflation at a higher rate. How then can you meet expenses in the future? The answer is investing. When you invest, you give your savings a chance to generate inflation beating returns, and a better opportunity to grow.

So, what are the benefits of mutual funds?

1. Earn potentially higher returns: Mutual funds invest in market-linked instruments, and hence can deliver potentially higher returns compared to your traditional products.
2. Professionally managed: You don’t need the know-how of how to manage your fund. Your fund manager will take the hard decisions on where to invest and how much to invest, to generate the best returns for your investment. Just invest, sit back and relax!
3. Diversification: Your investment is spread across a bunch of securities, so that your risk is minimised. If a stock does badly in a portfolio, its losses can be offset by a good performer. The aggregate of their performance, and your fund manager’s timely calls impact your returns.
4. Affordability: You can start investing with as little as 500. A small investment can go a long way, and thanks to the power of compounding, you earn returns on your investment and even its returns.
5. Liquidity: Most mutual funds come with no lock-in and can be redeemed easily. Your redemption proceeds get credited straight to your bank account.
6. Flexibility: You can choose how much you want to invest, how you want to invest (lumpsum or periodically through a SIP), when you want to invest.
7. Options: There’s a mutual fund for every goal. If you want to build an emergency fund, you can invest in liquid funds. If you’d like to build wealth, you have equity mutual funds, if you want stability, you can choose from debt mutual funds. Keep in mind your risk appetite and investment time-frame.

WHO are mutual funds for?

Mutual funds are for everyone! Whatever your goal, there’s a fund that’s just right for you.

WHEN should you invest in a mutual fund?

Now would be a great time to invest in a mutual fund. We’ve always believed that the best time to invest is now. Also, the earlier you invest, and the longer you stay invested, the more opportunities you give your investment to grow.

HOW can you invest in a mutual fund?

You can talk to an advisor and invest in a mutual fund or go direct and invest with asset management companies. It’s easy! All you need is a bank account, and your PAN and you’re good to go.

Get started with your first investment today.

Title caught your eye? Picture these.

• Apple launches the newest iPhone and you just must have it. How will fund your purchase?
• Your company doesn’t do too well, and to stay afloat, the management decides to let go off some employees. You’re one of them. How will you meet your expenses until you find a new job?
• You’re having a good time baking a cake for a bake sale. Your oven malfunctions and there’s a fire. How do you deal with the repairs?
• The paint on your walls is wearing off, and you want to get a paint job done. How will you fund this?

The thing these statements have in common is that all of these require money. BUT there is a difference – some of these are planned expenses that you can save for over time (the iPhone and paint job), and some aren’t. Nonetheless, you need to be prepared for these.

This is where an emergency fund comes in. An emergency fund is money that you’ve set aside to cover any financial surprises life throws your way.

What is an emergency?

An emergency is “a serious, unexpected, and often dangerous situation requiring immediate action.” For example: job loss, a medical or dental emergency, unexpected repairs, unplanned travel.

How much should you save for emergencies?

The rule of thumb is to ideally have three-six months of expenses saved in an emergency fund. You can arrive at this by adding up your monthly expenses and multiplying it by the number of months. While you include regular bills on food, rent, electricity, water, fuel and other expenses, don’t forget to include loan payments (in case you have one or are considering one) and payments you make once a year like insurance.

Where can you put your emergency savings?

NOT your savings account. Why? While your savings are easily accessible, earn an interest and have no risk, it’s not a good idea to use this for emergencies. This is because you might give into the temptation to spend just a little extra every now and then, and this could eat into those funds.

Now, you would want your emergency fund to be an alternate to your savings account – one without a debit/credit card that’ll allow you to spend. Liquid funds are one such alternate. They’re easily accessible, can earn higher than savings returns, and come with low risk. Some liquid funds even come with an instant redemption facility. You may consider ultra-short term funds if your holding period is 3-6 months.

How to build your emergency fund?

1. Regularly invest– Set up an auto-debit from your salary account to this fund. This way, when money comes in, a part of it is invested for emergencies.
2. Review your expenses to see what you can do without– There’s a fine line between needs and wants, and even when it comes to wants, you don’t have to give up everything. One cab ride less, or fewer cigarettes a day and you might have money left at the end of the month.
3. Use spare cash– Reviewing your expenses to see what you can do without can result in having cash to spare. Transfer this to your fund, so it’s untouchable until an emergency.

Benefits of an emergency fund

1. Keeps you from spending unnecessarily– If you keep your emergency money in the same account as your savings, you may be tempted to splurge a little on frivolous things. Keeping it out of immediate reach keeps you from spending it.
2. Decreased dependency on borrowing– An emergency fund keeps you from swiping your credit card unnecessarily, or from even borrowing from the bank to meet emergencies. This way you won’t have to worry on paying interest, fees or a penalty on debt.
3. Lower levels of stress– Building an emergency fund prepares you to meet any financial emergencies, and this way you’ve lower levels of stress than if you’ve to deal with borrowing and interest payments.

Things to remember:

1. Make sure you differentiate between planned expenses and emergencies
2. Your emergency fund should fit in with your other goals
3. Don’t forget to review your emergency fund from time to time, so you can add adequately to it with changes in your lifestyle and keep up with inflation.

If you haven’t got an emergency fund already, start investing for it today.

SEBI has categorized mutual funds into equity, debt, hybrid, solution-oriented schemes and other schemes. We’ve addressed equity mutual funds and debt mutual funds in our earlier articles. We’ll now look at hybrid funds.

Hybrid funds, as the name suggests, are a mix of equity and debt in different proportions.

Funds that have a higher allocation to equity than debt are equity-oriented hybrid funds and those that have a higher allocation to debt are debt-oriented hybrid funds.

Let’s look at how SEBI has categorized hybrid funds.

Conservative Hybrid Fund

Conservative hybrid funds have a very low allocation to equity and equity related instruments – about 10% – 25% of total assets, and the rest is invested in debt. As a result of their minimal allocation to equity, these funds come with stable returns and are suitable for investors with a short-term investment horizon of 2-3 years

Balanced Hybrid Fund

Balanced hybrid funds seek to strike an equilibrium between the equity and debt components – the allocation to each comprising between 40% and 60% of the AUM. As these funds have an allocation to equity that is fairly high (minimum 65% in pure equity funds), they are suitable for investors who have a moderately high-risk appetite and investment horizon of 3-5 years.

Aggressive Hybrid Fund

Aggressive hybrid funds allocate a greater portion of the portfolio to equity & equity related instruments – between 65% and 80% of the AUM, and the remaining 20% – 35% of the AUM is invested in debt securities. This fund is suitable for investors with a high-risk appetite and an investment horizon of 3-5 years.

Dynamic Asset Allocation or Balanced Advantage

Dynamic Asset Allocation funds or Balanced Advantage funds, as the name says allocate AUM to equity and debt dynamically. SEBI has not mandated that a certain percentage is to be invested in equity and another in debt. This allocation is at the fund manager’s discretion. The beauty of this fund type is that when markets are growing, fund managers can capitalise on the growth with a higher allocation to equity, and when they are falling – they can cushion the investment with a higher allocation to debt. These funds are for investors who have an investment horizon of 3- 5 years.

Multi Asset Allocation Funds

Multi asset allocation funds invest in at least three asset classes with a minimum allocation of 10% in each of the three asset classes. In India, asset classes include equity, debt, gold ETFs. In foreign markets, funds also invest in real estate, commodities, hedge funds and private equity. Investors can choose between aggressive, prudent or conservative allocation to these asset classes depending on their risk appetite. One thing to note here is that foreign securities are not treated as an asset class on their own. These funds are suitable for investors who have an investment timeframe of at 3-5 years.

Arbitrage Funds

Arbitrage funds are those that follow an arbitrage strategy. Arbitrage, by definition, is the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms to take advantage of different prices for the same asset. The difference in the cost price and selling price is the return generated by the fund. These funds invest a minimum 65% of the AUM in equity & equity related instruments. What sets arbitrage funds apart from balanced hybrid funds is that in the latter, while allocation may overlap, no arbitrage is allowed in the fund. Arbitrage funds are suitable for investors with a medium-term horizon of 3-5 years.

Equity Savings Funds

Equity savings funds invest in equity, debt and seek to generate returns capitalising on arbitrage opportunities. The minimum allocation to equity & equity related instruments is 65% of the AUM, and minimum debt allocation is 10% of the AUM. A part of the equity portion is hedged – invested to reduce the risk of adverse price movements in an asset. This minimum hedged portion depends on each scheme and can be found in the Scheme Information Document (SID). These funds are suitable for investors with an investment timeframe of 2-3 years.

Hybrid funds are not a substitute for equity funds. However, beginner investors could explore these before moving to equity funds for wealth creation. Which fund you invest in should be in line with your investment goals, risk appetite and timeframe. Consult an advisor today!

Debt mutual funds are those that invest in fixed income instruments – such as corporate and government bonds, overnight securities, corporate debt securities, money market instruments etc. These funds are ideal for investors who are averse to risk and seek to generate regular income.

Debt funds are a good tool to use if you want steady income with low volatility and higher than bank returns. They also come with greater tax-efficiency than these products. We’ll address the advantages of debt funds and compare them with similar products in another article.

Let’s look at how SEBI has categorized debt funds.

1. Overnight Funds

These funds invest in overnight securities having a maturity of 1 day. They are the least risky of all debt fund categories, and this low risk comes with low returns. How these funds work is that at the beginning of each day, the AUM is invested in overnight securities, and since they mature the next day, the fund manager can buy fresh overnight bonds the next day using the principal and return earned. NAV of this fund will increase little by little over time. The advantage of this is that changes in the RBI rate, credit rating of the borrower do not affect your investment.

2. Liquid Funds

Liquid funds invest in debt and money market securities such as treasury bills, government securities, call money with a maturity of up to 91 days. These are a good tool to use to park surpluses and to build an emergency fund. These can also be used to transfer that surplus to an equity fund using a Systematic Transfer Plan (STP). What’s interesting to note is that some liquid funds even come with an instant redemption facility.

3. Money Market Funds

Money market funds invest in money market instruments such as commercial papers, certificates of deposit, treasury bills, repo agreements of the highest quality with a maturity of up to 1 year. These are suitable for investors with low risk appetite and an investment horizon of at least a year.

4. Corporate Bond Funds

Corporate Bond Funds invest in debt instruments issued by companies. These instruments comprise of the highest rated bonds, debentures, commercial papers and structured obligations. Minimum investment in corporate bonds by these funds is 80% of the AUM. They are suitable for investors with an investment tenure of 3-5 years.

5. Credit Risk Funds

Credit-risk funds are debt funds that invest at least 65% of total assets in papers rated less than AA (not of the highest quality). As these funds take on more risk than most other debt funds, they come with the ability to generate higher returns too. It is suitable for investors who can assume high risk and have an investment horizon of at least 3 years.

6. Banking and PSU Funds

Banking and PSU debt funds invest at least 80% of their corpus in debt instruments of banks, Public Sector Undertakings and Public Financial Institutions. They come with low risk and are suitable for investors who have an investment horizon of 1-2 years.

Invest now

7. Duration funds

Duration funds invest in debt and money market instruments that have different maturities. Based on the maturity of instruments, they are classified into ultra-short (3-6 months), low duration (6-12 months), short duration (1-3 years), medium duration (3-4 years), medium to long duration (4-7 years), long duration (7+ years). The longer the tenure of the fund, the higher its ability to take risk. Investors in these funds should invest if the maturities are in line with their investment horizon as the fund will take this time to give an investor his principal and the interest owed to him (Macaulay duration) for investing in the fund.

8. Dynamic Bond Funds

Dynamic bond funds invest in instruments with varying durations. These are actively managed funds and are suitable for investors who find it difficult to judge interest rate movement and have an investment horizon of 3+ years. This is because these funds hold securities with reducing portfolio maturity when interest rates rise and increasing portfolio maturity when interest rates fall.

9. Gilt Funds

Gilt funds invest at least 80% of their total assets in Government securities (G-secs). These are issued by central and state governments across various tenures, both long and short. They usually have no default risk as these are government backed. They do come with higher interest rate risk for instruments with higher maturities. These funds are suitable for investors with an investment horizon of 3+ years and benefit the most in a falling interest rate environment.

10. Gilt Fund with 10-year constant duration

Gilt funds as discussed earlier invest in government securities. In the case of funds with a 10-year constant duration, assets held in the fund have a Macaulay duration of 10 years and are suitable for investors with this investment horizon in mind.

11. Floater Funds

Floater funds invest a minimum of 65% of assets in floating rate instruments and the rest in fixed income securities. Floating rate instruments are those that don’t have a fixed interest. If interest rates rise, the interest from these funds also rise immediately. These funds invest in securities that have medium to long-term maturities.

12. Fixed Maturity Plans (FMPs)

FMPs are passively managed close-ended funds, where investments are held to maturity. These can be considered as an alternative to FDs as they have the potential to deliver FD beating returns. Another advantage they have over FDs are that they come with better tax-efficiency. We will discuss tax-efficieny of mutual funds in another article.

It’s the end of another financial year, and many of you will be receiving your annual performance bonus. Exciting time, isn’t it? I bet you’ve got fantastic plans of how to splurge it. I’ve got them too, with a little boring, but necessary checklist I thought I should share.

I hope that maybe it helps you too. Without further ado, here’s 7 bonus ideas you need in your life.

1. Pay off debt:Credit card bills, student loans, vehicle or home loans, you could have any of these. It might be a good idea to pay these bills and also set aside some money for any future loans you may be considering. This will minimise the principal amount you owe and you can save on hefty interest payments.
2. Add to your retirement fund:Your retirement may be a long way off, but no one tells you it’s one of the first goals you should start saving for. Why? Look at cost of living today. If you spend 30,000 a month today as living expenses, 20 years down the line assuming inflation is at 6%, you’ll be spending 1.72 lakhs a month. Start putting aside a little by little with a Systematic Investment Plan in mutual funds to build wealth for your retirement. You can also invest in NPS and PPF for relative safety. Use a retirement calculator to figure out how much your SIP amount should be.
3. Build an emergency fund:Life is unpredictable. So, isn’t it a smart move to be prepared? You may lose your job, or your company isn’t doing well and can’t pay salaries, or for some reason, there is little or no income. It’s ideal to have at least 6 months of expenses saved in an emergency fund. Do not touch this unless it truly is an emergency. Consider a liquid fund for this. Frivolous purchases are not emergencies and can be planned.
4. Invest for longer term, big ticket goals: You’ve got a lumpsum in hand, why blow it all up now? You may want to purchase a car in the future, make the down payment on a house, fund your child’s higher education, or even start a business. Whatever your goal may be, no matter how far, start setting aside funds today for it. You can even start a SIPin mutual funds. Time and compounding will work for you.
5. Get insurance: Ever considered who will take care of your family should anything happen to you? Get a term plan to secure your family financially in case you die. The earlier you get it, the lesser the premiums cost. Don’t delay this until next year.
6. Buy health cover for your family: Health is wealth, and when your bonus can help you secure your family’s health, why not? There could be a time when your employer’s health cover may not be enough to cover all expenses. Consider purchasing a family floater health plan.

Invest in yourself: An investment in yourself is the best investment. Take a course, learn a skill, join the gym, read! Meet people, socialise, and don’t forget to have fun. You’ve earned it.

Health is wealth. Good health is not just the absence of any illness, but complete physical and mental wellness of an individual.

In today’s world, stress affects both physical and mental health – and one contributor to stress is the state an individual’s finances.

We all have financial goals we want to reach, and savings just don’t cut it. It’s important to invest. While we invest, how do we know we’re doing the right thing for our goals?

Here’s where your financial doctor, or advisor, comes into the picture. Just like you need a doctor for your physical or mental health, you need one for your finances too.

So, how can your financial doctor help you?

1. Understand your financial health –Your financial advisor will work with you to assess your current financial health – your assets, liabilities, income and expenses. He/she will also consider any expected future obligations (insurance, taxes, other long-term expenses) and sources of income (pension, gifts, etc.) to get a complete picture of where you stand.
2. Assess your goals –Once your advisor maps out where you stand, he/she will understand your investment goals, time frame and risk appetite. An understanding of risk appetite will allow your advisor to determine your asset allocation. He/she will also assess your retirement needs at this stage.Invest now
3. Build the financial plan –The next stage is where your advisor charts out a comprehensive financial plan for your goals. This plan will include details such as where to invest, how much to invest, for how long to invest. He/she has the expertise to understand how all these products will work in tandem for you to achieve your goals. The plan will also look at your retirement plan, your projected withdrawal rates during retirement and have the best- and worst-case scenarios for your expected life span. If you’re already investing for your goals, your advisor will review your current habits and suggest a course of action. If you’re investing without goals in mind, your advisor will help you allocate your existing investments for your goals. Read why goal-based investing is important here. Once your plan is ready, it’s on you to implement it.
4. Help you understand where you’re investing –When building your financial plan, it is important to understand the products you’re investing in. The pros and cons, how it fits in your portfolio, what it can do for you – your advisor will help you with this.
5. Regular reviews and adjustments –It’s a good idea to revisit your investments regularly to check if you’re on track, review what you’re doing and see if you need to adjust your plan to incorporate new goals or modify/remove existing ones. Depending on your needs, your advisor will suggest changes to take you closer to your goals.

Financial advisors are the doctors you need for your financial health. With their expertise, you can get the best out of your investments.