Systematic approach to investing: SIP, SWP, STP

SIP

A systematic investment plan (SIP) is a plan in which investors make regular, equal payments
into a mutual fund, trading account, or retirement account. SIPs allow investors to save regularly
with a smaller amount of money while benefiting from the long-term advantages of rupee-cost
averaging (RCA). By using a RCA strategy, an investor buys an investment using periodic equal
transfers of funds to build wealth or a portfolio over time slowly.

Benefits

1. Disciplined investment approach

2. Allows you to start small and increase the investment amount gradually
3. Comes with two beneficial investment strategies:

 Power of compounding- the returns are compounded making the amount huge
 Rupee cost averaging- balances out the risk and volatility

4. Easy to use
5. Timing the market is not required

SWP

An SWP allows you to withdraw a specific sum of money from a fund at regular intervals. Such
a system is particularly suited to retirees, who are typically looking for a fixed flow of income.
SWPs provide the investor with a certain level of protection from market instability and help
avoid timing the market.

STP

Generally, one opts for an STP when there is a lump sum to invest. Like a SIP, an STP helps
spread out investments over a period of time to average the purchase cost and rule out the risk of
getting into the market at its peak. However, with an STP, you invest a lump sum in one scheme
(mostly a debt scheme) and transfer a fixed amount from this scheme regularly to another
scheme (mostly an equity scheme).

The basic idea behind an STP is to earn a little extra on the lump sum while it is being deployed
in equity, since debt funds provide better returns than a normal savings bank account.

Depending on the lump-sum amount, the investor can decide the period over which he wants to
deploy the money in the market. Typically, the larger the amount, the longer the time period.

An STP can be done from an equity fund to a debt fund as well. If you are saving for an
important goal like your child’s education, buying a home or retirement and you are nearing your
goal, don’t wait till the target date. Begin moving your money from equity to debt well before
the time when you will need the money.

Following are the benefits of STP

1. Consistent returns
2. Cost averaging
3. Portfolio Re-balancing

Types of STP

1. Fixed STP: A fixed amount is drawn from investment and invested in another.
2. Capital appreciation STP: The profit gained from one investment is drawn out and
invested in other.
3. Flexi STP: A flexi-STP allows you to keep one set of funds in one investment type say
debt funds and transfer it to other type say equity funds depending upon the market
condition.

Financial Plan; Goal based Financial Plan

Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a
guide as you go through life’s journey. Essentially, it helps you be in control of your income,
expenses and investments such that you can manage your money and achieve your goals.

A financial plan is a document containing a person’s current money situation and long-term
monetary goals, as well as strategies to achieve those goals. A financial plan may be created
independently or with the help of a certified financial planner.

Enjoy a better standard of living

Most people assume that they would have to sacrifice their standard of living if their monthly
bills and EMI repayments are to be addressed. On the contrary, with a good financial plan, you
would not need to compromise your lifestyle. It is possible to achieve your goals while living in
relative comfort.

Increase your savings

It may be possible to save money without having a financial plan. But it may not be the most
efficient way to go about it. When you create a financial plan, you get a good deal of insight into
your income and expenses. You can track and cut down your costs consciously. This
automatically increases your savings in the long run.

Attain peace of mind

With adequate funds at hand, you can cover your monthly expenses, invest for your future goals
and splurge a little for yourself and your family, without worry. Financial planning helps you
manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet
reached this stage. If you are on the path of financial planning, the destination of financial peace
is not very far away.

Be prepared for emergencies

Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure
that you have a fund that is equal to at least 6 months of your monthly salary. This way, you
don’t have to worry about procuring funds in case of a family emergency or a job loss. The
emergency fund can help you pay for varied expenses on time.

Goal based Financial Plan

Goal based financial planning is a method which can help you achieve multiple goals across
different stages of life. There are some common life-stage goals of most investors e.g. buying a
house, children’s higher education and marriage, retirement planning and leaving an estate for
your loved ones. In addition to these goals, some clients may have other goals specific to their
individual needs and aspirations e.g. planning for a foreign vacation, buying / building a vacation
home, saving a corpus to start a business, accumulating for early retirement etc. Goal based
planning is the process of defining different goals, quantifying these goals factoring in inflation
and having an investment plan to meet these goals.

Step process:

1. Setting goals: You should lay-out all your goals in different stages of life. You should
estimate how much money you need for each and always factor in inflation, especially for your
long-term financial goals.

2. Assessing your risk appetite: This is an important step in financial planning because you
need to take the right amount of risk to achieve your financial goals. If you take too much risk,
you may lose your hard-earned money due to adverse market movement at the time you need it.
If you take too little risk, you may not be able to get sufficient returns to meet your goals. Your
risk appetite depends on your age, stage of life, goal time-lines and financial situation. You
should always invest according to your risk appetite.

3. Expense Budgeting: You should assess your post tax income, your expenses (essential and
discretionary), assets (bank deposits, mutual funds etc.), liabilities (car loans, home loans etc.)
and create your budget. Once you have a budget, you know how much you can save and invest in
a systematic way for your financial goals. Suggested reading: Maximise your SIP returns in
volatile markets.

4. Prepare an investment plan: This is the final step of the financial planning process. Once
you know your goals, risk appetite and asset allocation profile, the rest of the job is simply to
calculate how much you need to save and invest based on goal amount, goal horizon and
expected return on investment based on your asset allocation. Sometimes in this step, you may
realize that you need to save more and cut down some discretionary expenses. Do not despair, if
you are not able to save more. You should start with what you can save. Over period of time, as
your income goes up, you will be able to save and invest more. You can use facilities like Top-
up SIPs, to increase your investments over time and achieve your goals.

5. Asset allocation according to goals and risk appetite: Risk and returns are interrelated
higher risk, higher returns in the long term and vice versa. Different asset classes have different
risk profiles, e.g. equity has a higher risk profile compared to gold or fixed income. Remember
that for different financial goals, you should invest in the right asset class depending on the goal
and risk appetite.

Comprehensive Financial Plan, Financial Blood Test Report

A comprehensive financial plan involves a detailed look at your current financial situation, a
discussion of financial goals and the development of a plan and the financial products to get from
here to there. A small business owner should include both personal financial assets and the value
of the business in the total plan.

Tax Planning

The tax planning part of your financial plan also coordinates with the other sections of the plan
to ensure your financial choices are as tax efficient as possible. You pay personal and business
income taxes and must always be aware of estate taxes. Tax planning works to avoid paying too
much money to the government and keeping as much of your financial assets for you, your
family and your heirs.

Your Assets

The different portions of your financial plan will be integrated with each other and the different
parts will include aspects of other sectors of the plan. On the assets pages of your plan are your
investments and your retirement savings. Investments could include stocks, bonds, mutual funds
and investment real estate. The plan should review whether your current mix of investments is
appropriate to meet your long- and short-term goals. On the retirement savings side, the plan
reviews the types of plans you have selected, how they are funded and if you have picked the
best type of plan for your business.

Passing Along Wealth

The estate plan portion of your financial plan covers how to ensure everything you worked for is
passed efficiently to your heirs. This portion of the plan includes information about your
investments, life insurance, wills and trusts and the disposition of your business assets. As you
increase your wealth and move through the stages of life, the estate planning portion of your
financial plan tends to become a strong force in the decision-making process for all parts of the
plan.
Your Protection

The protection section of your plan covers the different types of insurance. Property and casualty
products like auto and homeowner’s insurance are straightforward. As a business owner, liability
insurance protects you and your business against legal actions. Life insurance is important to
provide a standard of living to your family, pay estate tax bills or to cover business obligations.

Reaching Your Goals

The purpose of putting together a comprehensive financial plan is to ensure your current and
future choices in the financial markets are positive steps toward reaching your financial goals. To
coordinate the varied aspects of your financial life, you probably need one financial adviser with
the training to develop a comprehensive financial plan. This adviser will work and coordinate
with the other professionals who handle parts of your finances such as insurance agents,
investment advisers and lawyers.

A comprehensive financial plan involves:

 A discussion and understanding of your long term, financial goals

 A thorough review of your current financial situation.
 The development of a plan including all financial products needed to take you from
where you are today to where you need to be in the future.

A solid financial strategy includes, among other topics specific to your life situation and goals:

 College planning
 Retirement planning
 Tax management
 Risk management
 Debt structure
 Estate management
 Insurance
 Complex life issues. This includes your family structure, such as taking care of aging
parents now, or perhaps sooner than you expected to.

Financial Blood Test Report

In accounting, a financial condition report (FCR) is a report on the solvency condition of an

insurance company that takes into account both the current financial status, as reflected in the
balance sheet, and an assessment of the ability of the company to survive future risk scenarios.
Risk assessment in an FCR involves dynamic solvency testing, a type of dynamic financial
analysis that simulates management response to risk scenarios, to test whether a company could
remain solvent in the face of deteriorating economic conditions or major disasters. Dynamic
solvency testing may involve both deterministic projections, based on known risks, and
stochastic projections that include random risk events.
The Financial Blood Test framework makes it easier for planners to render the service; and
easier for investors to understand the report and resulting strategy. It can be offered by any
planner in a financially viable format. Employees in banks can offer the service to a large
number of clients. It is also possible for remote branches (which might suffer from weaker skill
sets) to offer financial planning in the hinterland of the country.

Thus, financial planning can become a mass service so critical, when the population mass has the
money, but lacks the financial literacy.