Use Freedom SIP To Make Money Work

Legendary investor Warren Buffett has often said that if you don't find a way to make money while you sleep, you will work until you die. Hence, finding ways and means to make money work for you is important. Very often the freedom to do, pursue things we like is barricaded by lack of financial resources. Travelling the world, early retirement, living a dream life etc. are impossible tasks without money. So, how about a smart way to generate another source of income while you work hard? In this manner, you can gain financial freedom without changing too many things in your current life.   

Invest first, withdraw later

To live the life, you always wanted, you must plan ahead. A caterpillar needs time to turn into a beautiful butterfly. So, you must think and decide when exactly (which year from now) you want your freedom. Once you decide the time i.e., 10, 15, 20 years later, depending on the size of your dream, you must invest small sums regularly to reach the milestone. Once this corpus attains your target size, from then on you can withdraw and achieve true financial freedom. 

A smart way to achieve this is by using the Freedom SIP feature. This feature allows initial investments through Systematic Investment Plan or SIP into a source scheme for the period of one’s choice. When this tenure is over, the corpus created is switched to a target scheme (as per one’s choice) and from this target scheme Systematic Withdrawal Plan or SWP is initiated. The SWP will be processed either till Dec 2099 or till the units are available in target scheme, which means all your corpus money is used for your benefit.

In this manner, the feature offers a suitable combination of schemes, which inculcates not only long-term investment habits but also provides a goal-orientation and focus required to generate an additional income stream. 

Understanding the system

Freedom SIP works in three distinct phases. One, is the investment phase. Next is switch phase when your investment grows and is transferred from source scheme to target scheme. Third is the withdrawal phase when you enjoy the fruits of your labour. Let us understand below how this works.

In the investment phase, your hard-earned money grows into wealth. You have to take 4 decisions in this phase. 

1. Choose a monthly SIP amount, say Rs 10,000.

2. Choose the SIP tenure, say 8, 10, 12, 15, 20, 25 or 30 years.

3. Depending on the SIP amount and tenure chosen by you, know the monthly SWP payout. The monthly SWP payout can be 1x, 1.5x, 2x, 3x, 5x, 8x or 12x of SIP amount depending on the tenure chosen.

4. Choose the source scheme where your money will be invested. Ideally, at this stage for wealth creation, investors should opt for equity oriented schemes given that the investment is long-term in nature. 

Once the SIP tenure is over, the switch phase begins. The SIP investments after growing into serious wealth is transferred to a target scheme. The idea of this step is to protect the wealth created over the past years by investing in a less aggressive scheme such as the debt or hybrid schemes.   

Once done, the withdrawal phase begins. Here, the multiplier will come into play and the SWP payout to your bank account will occur at pre-defined intervals. The beauty about the arrangement is that while funds are being withdrawn, there is a growth element playing out in the target scheme fund as well. Hence, even after continuous withdrawals, back tested data show that a diligent investor will be money to spare. While all of this plays out the arrangement is also one that is most tax efficient. 

To conclude, if you are an investor who is serious about financial goals like early retirement or creating corpus for kid’s overseas education, then opting for freedom SIP will be very beneficial. The key is to stay invested in a growth asset class and they reap benefits from the same in a staggered manner. With zero procrastination, this will set you on the journey to achieving your dreams in a seamless manner.

Author- Randhir Kumar Patley, Director, Randhir Patley Investment