IN HIS WONDERFUL book The Psychology of Money, Morgan Housel makes an important point on financial freedom: “The ability to do what you want, when you want, with whom you want, for as long as you want to, pays the highest dividend that exists in finance.”
Many want to retire early, see the world, follow their passion and volunteer their time for social causes. Others want to take the regular path by retiring when it is eventually time for it, but they, too, would have to plan for a long life after retirement.
Be it a professional in the early phases of their work life, or a mid-career employee, or someone who is just a decade or so away from retirement, she would like to be financially free―to reach the stage defined by Housel. Such freedom is earned only with meticulous long-term planning of your money matters and investments.
But what if you have a wonderful tool that gives you the means and tools to achieve financial freedom in a systematic manner? That is where the ICICI Prudential Mutual Fund’s Freedom SIP comes in. By combining the best of systematic investing and withdrawals, it is a great way for people of all income levels and ages to save for a peaceful life.
How the Freedom SIP works
As with any financial planning task, the process starts with determining the target amount, available monthly surplus for investing, time horizon, and risk appetite. Now, here is where the Freedom SIP comes into play. There are two phases to this tool.
The accumulation phase: You can choose the amount you want to invest each month in the scheme of your choice. This is called the source scheme. The time horizon can be one of eight, 10, 12, 15, 20, 25 or 30 years. So, the earlier you start and the longer you stretch your investment horizon, the higher your accumulated corpus.
The withdrawal phase: Once you finish your investment tenure, the corpus created is moved to another scheme called the target scheme. It is from this scheme the withdrawal phase starts―the time to reap the rewards of discipline. Here, you have the option of maintaining the target scheme the same as the source scheme. Either way, the setup is such that your corpus will continue to grow, even as you withdraw every month.
For withdrawal purposes, you can either specify the amount you wish to withdraw each month or allow Freedom SIP to work with a formula. For investors who invested via SIPs for eight years, the Freedom SIP tool allows them to withdraw the same amount every month that was invested during the accumulation phase.
For 10, 12, 15, 20, 25, and 30 years, the withdrawal amount will be in multiples of the SIP amount. For example, if you invested Rs10,000 every month for eight years, you can withdraw Rs10,000 every month after the accumulation phase. If you invested for 30 years, you can withdraw Rs1.2 lakh every month as long as your corpus lasts.
Illustrating the returns
Let’s say you invest Rs10,000 a month for a period of 20 years. You will end up investing Rs24 lakh in total. At the end of 20 years, assuming that the ICICI Prudential fund that you choose gives 12 per cent returns annually, you would have a corpus of Rs99.91 lakh. According to the Freedom SIP formula, you can withdraw Rs50,000 every month. You will end up withdrawing 6 per cent of your accumulated corpus every year.
You can start Freedom SIP first for a long tenure. Then you can invest in another scheme as your surplus increases. An investor can start the Freedom SIP of say Rs20,000 for 30 years first. Five years later, as her surplus increases, she can invest another Rs20,000 for 25 years and so on.
To conclude, Freedom SIP allows an investor to invest and withdraw in a staggered and disciplined manner. In this manner, an investor can achieve one’s goals and have a steady stream of cash flow in the later years of one’s life.
Praveen Kumar is managing director, Future First Financials Pvt Ltd