As you grow in life your needs and wants also grow. When you get your annual salary increment, the first thought always tends to be about your increased spending and borrowing capacity. With more money comes the added temptation to spend more and upgrade your lifestyle. This is human nature to want more when we have the means. Rarely does one think that with increased income, you can save more too! Almost everyone tends to ignore regular increases in investments and savings in the same proportion as your income growth.

While you may have allocated a fixed amount for investments such as mutual funds via SIPs, it is also important to increase the amount to match the hike in your income. More money in your hands not only means an increase in the ability to spend. It also means the responsibility to save and invest more.

However, it would be an additional task to increase your investments every year manually. The answer to this is the top-up or step-up facility available for SIPs. A SIP top-up allows you to increase the SIP amount at a pre-determined interval. For most fund houses, the interval is half-yearly or annually. The SIP top-up amount can be specified as a fixed amount at the set frequency over the original SIP amount. 

Wealth Creation with Top-Up:

Increasing your mutual fund SIP even by a small amount will help you to make more money in the long run. Let’s see the comparative results for a period of 15 years and an assumed return of 12%. 

As is visible, the wealth created more than doubles for the given horizon. Even small changes in the top-up amounts can lead to significant impacts in longer investment horizons. 

How Top-up SIPs can be helpful to you?

Some of the significant benefits of stepping up your SIP amount or increasing them periodically are as follows:

1. Convenient way to fight inflation: Inflation, or rising prices, erodes the purchasing power of our hard-earned money. A fixed SIP over the years means that you are saving less and less, as the value of money decreases. Further, the amounts that seem substantial to fulfil a financial goal today may not be a few years down the line as your status /living standards improve. Top-up SIP helps you counter inflation and keep you on track to match the impact of inflation on your overall financial plans. It is advisable to raise the SIP contributions equivalent to the inflation rate or more, just to maintain the real value of savings with time. 

2. Achieving bigger and faster goals: Regular growth of SIPs can help you reach your financial goals faster as you can accumulate the target amount earlier than the planned maturity date. The more you invest, the more you can accumulate with the power of compounding. Further, If your goals have a fixed maturity date, then you will have a higher accumulated wealth giving you more choices. 

3. Safety net for lower returns: At times, it may happen that the markets haven’t delivered the expected returns and/or at the time of goal maturity, the markets are in a bear phase. During such times, if you have increased your SIP more than initially planned, then it is likely that this risk is reduced. With additional wealth created with that extra top-up /new SIPs, you will have a margin of safety for market volatilities.

4. Better use of your increased income

When you get an annual increment, you may not immediately think of increasing your investments. But, if you top-up your SIPs annually by the expected increase in your income, you will automatically make prudent use of part of your risen income. Auto debits ensure you save and invest regularly. The proportion of your savings grows along with the rise in income and cost of living and maintains your overall savings ratio.

How to boost your SIP?

There are two ways to step-up your SIPs every year. 

1. Start a fresh SIP and decide how much more money per month you’d like to invest. You can do that either in the same scheme (the SIPs won’t get clubbed) or in another scheme in the same folio.
2. If you have an existing SIP and you want to increase your contribution, very few fund houses allow you to do that midway. However, most fund houses allow you to decide the top-up amount right at the time when you start your SIP, before you pay your first instalment. So, it is better to opt for a top-up SIP while starting your SIP.

Conclusion

SIPs help you become financially disciplined through regular investments. SIP top-up further ensures that you save and invest your disposable income to keep pace with inflation and growing income. It helps you build a superior corpus faster and accelerate the journey to reach your goals sooner. As a habit or a practice, always try and have top-up registered with your SIP the next time you start one. Every extra rupee saved, will add more towards your financial well-being. 

You will be tempted to eat all the laddoos if they are lying in your plate in front of you. Likewise the extra money or year end bonus in our pocket will prick you until you spend it. Right isn't it?
The financial year has come to an end and we have got our annual bonuses. The same question of 'what to do with the bonus' arises every year. Should I buy a car? Should I go for a vacation? Should I pay off my huge credit card debt? Should I repay my home loan? Should I buy that new mobile? And the list goes on...
Bonus, like laddoos, tempts us to do something about it which might not be the right thing to do, especially if you are diabetic or in financial sense, not doing well enough. Take a pause; remember that you have earned that bonus through hard work not luck and hence it shouldn't be ruined for fun and luxury. Proper planning is strongly recommended for your bonus and one should be careful to not get carried away by emotions. Else, pretty soon we may realize that the bonus is gone and then regret.

What Not To Do?

Before going on to what we should do with our bonus, let's discuss the things which we should not do with our bonus...

• Keeping in the Bank Account: Often we find the bonus keeps lying into your bank account for long and you do nothing about them. Slowly, it gets eaten up by card payments and regular expenses... what a waste! We say “don't keep your bonus in the bank account”. A grace of say 10 days can be given before you can plan and deploy your funds elsewhere.

• Investing before clearing high interest loans: Do not rush into making investments before paying off obligations like credit card debt or a personal loan. They should ideally be repaid before investing the money, since the cost of such debt might be higher than the return on investments. Be careful though in not rushing to repay your home loan as it has some income tax benefits also to be factored before deciding to invest or repay.

• Big Purchases or Vacations: You will not achieve anything by blowing up your bonus in a vacation or a big TV. You'll cherish such things in the short run. But you have to secure yourself financially for long term pleasure. But at end of the day, it is also a question of personal affordability for such expenses and you need approval for the same, not from you, but preferably from your financial advisor...

What To Do?

Now, we know what we shouldn't be doing with our bonus. The question of what we should do with the bonus is answered below:

1. Liquid Mutual Funds: As an immediate first step, you might want to put your money to good use without any risk and with adequate liquidity … look no further than liquid mutual fund schemes. Instead of keeping your money in bank, you might not want to plan /research before properly investing. Liquid funds can also be of great advantage when you decide on equity mutual fund schemes to invest as you can then request a STP or Systematic Transfer Plan or a switch to any other schemes. An STP from a liquid fund to an equity fund is like an SIP in the equity fund where you lower the risk of lumpsum investing while generating returns on investments lying in liquid funds.

2. Invest, Invest and Invest: Ideally, more than 50% of your bonus should be invested. Keep your expense list down. Make a list of the investment avenues, where you will put your money. However, you should prioritize a few expenses like high interest bearing debt or some other important personal or family commitments. Depending on your asset allocation or your financial goals, you must invest some part of your bonus into equity funds.

3. Contribute to Retirement & Emergency Funds: You don't receive large sums of money everyday. Hence, one should be extra careful to allocate some part of your bonus to your yearly retirement fund. Remember that retirement is the biggest financial goal that you have for yourself. Small contributions made early in your life will give compounded returns to fill your retirement fund gap. The retirement savings will also help you as well as save taxes for the year, depending on your product choice. In addition, some money can also be parked as an emergency fund (preferably in liquid /short term debt funds) in case you do not already have one...

4. Start tax saving ELSS investments: This is the best time of the year to invest money in ELSS and other tax saving schemes. You have the time to plan, you can foresee your incomes and obligations and you have your bonus. So it's best to shift your tax burden from end of the year, when you might take wrong decisions because of lack of time or money, to now when you have both.

5. Relax: Since It's your bonus, you have the right to savor and enjoy it just like laddoos. The same should however be at a moderate level which is affordable, justified and which does not compromise your financial situation. At the end of the day, the positives or benefits from using your bonus must out weight the negatives or spendings you do. As a rule, you can keep maximum of 20% of net bonus received or 10% of your net annual income (whichever lower) as your upper limit of spending.

As informed investors, we should be familiar with the different investment routes or facility of investing offered by mutual funds. You may already be aware of SIP but likewise, there are also other facilities offered by mutual funds to invest, redeem or switch between investments, which are relatively unknown.

We have explored the SWP in one of our previous issues. This month, we would be exploring the STP or Systematic Transfer Plan in detail.

Thanks to the consistent marketing efforts by the industry, today SIP or Systematic Investment Plan have become a familiar term for investors. More people are now beginning to explore the savings route through SIPs. But as an investor, one should know that SIP is just one route or facility of investing. Likewise, there are also other facilities offered by mutual funds to investors to invest, redeem or switch between investments, which are relatively unknown. We shall be exploring these facilities in detail in the future newsletter issues. In this issue, we will talk about Systematic Withdrawal Plan or SWP.

What is SWP?

A SWP is a facility that allows an investor to withdraw money (redeem units) from an existing mutual fund scheme at defined time intervals. Thus, the SWP is something opposite or reverse of a SIP where periodic investments are made into the scheme. The SWPs are used by investors to create a regular flow of income from their investments for meeting various life objectives.

SWP Options:

There are certain additional options offered by mutual funds within SWP. As far as time intervals are concerned, the frequency options generally available to withdraw are on monthly, quarterly or annual period basis. In terms of the nature/type of withdrawal possible, investors normally have two options to choose from...

Fixed Withdrawal: Wherein specific amount of money can be withdrawn.
Appreciation Withdrawal: Wherein amount of appreciation only can be withdrawn.

Ways how you can use SWP in your lives:

SWP can help meet your cash-flow requirements for achieving any temporary or long term objective. It is one of the many ways available for planning regular income from savings. The following real life situations can help you realise the ways in which SWP can be planned

1. Mr. Amitabh will be retiring very soon. Post retirement he wants a steady income flow into his account.
2. Mrs. Kavita plans to take a break from work for a year to bring up her first child. She is exited and wants a steady inflow from her investments during this period.
3. Mr. Kishore has recently married and wants to create a perpetual cash flow for his wife while keep investment capital intact.
4. Mr. Banerjee is planning an investment in his son's name with regular withdrawals to fund his regular pocket money and tuition fees needs.

As we can see, SWP can be a very powerful facility which can be used smartly to meet your cash flow needs. It can potentially play a very critical role as part of a holistic financial planning for your family.

SWP: Tool for Investment Strategy

There are specific ways in which SWP can be smartly used to manage your wealth as well as cash flow requirement. If we can carefully manage the amount of SWP with the returns or appreciation expectation, we can strike a smart balance between periodic cash flow on one hand and capital appreciation/ reduction on the other hand. For financial planners, its a great tool to play with...

Stategy 1: Regular cash-flow keeping Principal Intact:

This is the simple strategy where the the option of 'appreciation withdrawal' is exercised for SWP. Thus, the withdrawal amount changes to adjust for the “appreciation” or gain made on the amount invested. In this way your capital stays invested while you continue to enjoy the gains periodically.

For example: Amount Invested R5 lac. Expected returns 9%. Monthly withdrawal option: Appreciation only meaning any amount over 5 lac will be to the investor on the selected periodic intervals. The main investment remains intact.

Strategy 2: Creating Perpetual Cash-flow:

This is the advanced version of strategy, wherein a 'fixed' withdrawal amount is kept lower than the expected returns or appreciation. So if expected returns is say 9%, you will be withdrawing below 9% every year. This way, a perpetual cash flow is ensured with lump-sum capital staying intact.

For example, if scheme “X” : Amount Invested R5 lac. Expected returns 9%. Monthly withdrawal: R3,000/- short of 9% yearly. This would create a perpetual cash flow of R3,000/- with invested capital staying intact or increasing slightly. An extension to this strategy is that if you have a big investment capital and mush smaller withdrawals, you may be able to increase your withdrawal amount every year and still continue to enjoy outflow for a longer period of time. A real life scenario for such a case would be retirement where the growing annuity would be needed to adjust for inflation. The other option would be to keep withdrawal constant, then you would be able to increase the value of your investment.

Comparison with other products:

Let us now compare the SWP option with some of the other products in market which offer regular income option.

Unfortunately, looking at the above comparisons, we can confidently say that there is not enough savings products or options available that is worth comparing to the SWP option in a mutual fund scheme. The popular SCSS and POMIS products may offer fixed returns but they also have limitations in terms of amount, period, mode of holding along with the inconvenience and operational hassles. Mutual funds which also offer debt and money market schemes can potentially deliver better post tax-returns, in addition to the many other advantages.

Way forward:

Times are changing. As investors, we need to take efforts to understand the options /facilities available to us and be open to incorporating these ideas to manage our wealth and our lives in a better way. SWP is one strategy that really helps you meet your consumption or cash-flow needs. Perhaps SWP is as important a tool for managing redemption or withdrawal of money as SIP is important for investing. We hope, the next time you are thinking of withdrawals, the idea of SWP shall cross your mind.