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Mutual funds don’t impose penalty for stopping SIPs

LiveMint logoLiveMint 14-06-2017 Srikanth Meenakshi

I have to withdraw all the money from my savings bank account due to an emergency at home. I have three systematic investment plans (SIPs) that go out from that account every month. I may not be able to service those SIPs for a few months. Are there any penalties for temporarily stopping SIPs?

—Kalyan Raman

SIP investments are commitments that an investor makes to one’s own self and their future financial well-being. They are not obligations made to the mutual fund companies. So, if you decide to temporarily suspend your SIP investments, there will be no penalties imposed on you. However, your bank may charge a penalty if a debit request from the asset management company (AMC) cannot be honoured due to lack of funds in your account. For this reason, it would be good for you to stop the SIPs for the time being and restart them as soon as your financial situation improves. Some AMCs and investment platforms provide investors with the convenience of ‘pausing’ their SIP investments. However, such a pause can be made for only a month or two at a time and cannot be indefinite. In your case, since you may not know when you would be able to start your SIPs again, it would be wise to stop them (by issuing stop requests to the concerned AMCs using the prescribed transaction form), and restart them just as they were when you are ready again.

I have close to Rs80 lakh in savings and fixed deposit accounts. I will retire in 3 years and I will hopefully have Rs1 crore by then. I want to create an income stream for myself post retirement and want Rs30,000 per month for my expenses. Where should I invest this money?

—Jadu Nandan Singh

There are a few things to note about doing what you seek to do. First, you need to factor in inflation to your cost of living in your retirement years. On the other side, you would also need to factor in a return that your retirement corpus is likely to generate through those years. Thirdly, you would need to make a rough estimate of the number of years you (and your spouse) are likely to spend in retirement. When you factor in the first—the inflation—and assume a 7% average rate of inflation, you will see that the 30,000 you need today will become 50,000 in 10 years and about a lakh in 20 years. To keep up with this growth in cost, your corpus would need to be invested to return either at this level (7%) or, preferably, more. If it returns 7%, an arithmetic calculation shows that you can withdraw about Rs30,000 a month today (and its inflation equivalent in future), for up to 30 years before running out of money.

The best way to implement such a post-retirement investment cum withdrawal plan is to employ mutual funds and use the facility of systematic withdrawal plan. The advantage of this approach is that you get the certainty that a specific, fixed amount will be available to you on a monthly basis. You can fine-tune the withdrawal amount depending on inflation and how your needs (such as medical expenses) grow as you progress. In terms of investment options, you should choose, for the most part, low-risk debt funds such as short-term income funds and ultra-short-term funds. A small portion, say 10% or 20% of your corpus, can be invested in balanced funds that provide exposure to the equity market and, hence, the potential for higher returns. This allocation should be considered as a long-term investment and should not be in the list of funds from which the systematic withdrawal plan is implemented.

I want to know about some good portfolio-tracking apps or software. Can you suggest some names. Does it make sense to use them or should I hire a financial adviser? I have some 12 schemes that I have invested in.

—Nimisha Gulati

There are two or three approaches you can take with regards to managing your portfolio.

One is, as you suggest, invest in a basket of funds and track them using a platform or software. There are quite a few apps and platforms—such as Value Research online’s and Morningstar’s portfolio feature—that enable you to do so with sophisticated analysis and tools for insights.

Another approach would be to use online/digital investment platforms to track your investments and use their in-built software and portfolio-management tools to track and manage your investments.

The third, of course, is to employ the services of a financial adviser who will both advise you about your portfolio as well as monitor it for you. He or she may also send you periodic reports about your investments, which you can use to know exactly where you are and how your portfolio is doing.

However, regardless of the approach you choose from the above, it is important to note that frequent monitoring of investments, especially those made in the equity markets, may not be a good thing to do. An annual check up is all it takes to ensure that your portfolio is in good health. If you do it frequently, you may be tempted to churn your investments unnecessarily leading to sub-optimal performance of the portfolio.

Srikanth Meenakshi is co-founder and COO,

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