Date : 28 April 2017

Whenever the subject of discussion is planning for your future, the hot topics are "Buying a car in the next five years or upgrading the car in 3 years","Buying a house in the next 10 years", "Funding for kids' education after 15 years", "Planning for Retirement after 25 years", etc. And then we save and invest for each goal. The agenda is to organize your finances by following the plan, and live a peaceful life. Our investment planning revolve around these long term goals. And that is what Financial Planning all about.

But then while planning for your goals in the "years to come", what is often ignored is the "months to come". We seldom plan for the near term goals. We are so organized with our child's higher education expenses, that we somehow forget about his quarterly school fee. We care for upgrading our car four years down the line but forget about the annual insurance of our car which is due six months hence. And then when these expenses suddenly arise, you strain your brain, you drain your accounts, you look for money kept at home, at times go to the length of even asking a friend, and after all this physical and mental labour, you pay off the dues.

And after all this exercise, when your energy is completely sucked out of your body, two days later, your wife comes to you and says, "Our anniversary is coming, Kahin ghumne chalte hain". You just can't control your temper and the RDX comes out, "Pura budget bigad gya hai" "Monu ki fee bhi deni thi, upar se chacha ji ke bete ki shadi ka kharcha, aur tumko anniversary manani hai". Your wife goes away without saying a word. This is "Toofan ke pehle ki shanti", and you know your wife well. So, now you have two more expenses coming up: One, the cost of taking your wife for dinner that very night, or else you are not getting dinner for time immemorial. And Two, the anniversary trip expense.

The purpose of this fable was not to scare you off, "Beware of your wife", rather it's about don't leave the short term expenses to luck. At times, near term expenses all bump in together, and sums up to a huge amount, which can disturb your finances and peace.

So how to plan for short term expenses?
Planning for short term expenses is also an important part of your overall financial planning. Many near term expenses are known, like you know you have your anniversary coming, and many of them are unexpected, like you may not know at the start of the year that your kid has to go for an educational trip next month for which you'll need an extra 10k.

1. Provide for the expected: Look at the brighter side, you know beforehand that you will need an X amount of money on an X date. So, you can set aside the required amount for these expenses. After all, celebrating birthdays and anniversaries are also a part and parcel of life, they give you the small doses of happiness which, may be unknowingly, but keep you going.

2. Provide for the unexpected: Like you plan for long term emergencies, be prepared for the short term urgencies as well. Keep aside a small amount for these expenses, so that whenever something pops up, you can close it by paying the requisite amount from your short term piggy bank, without turning your happy life topsy-turvy.

3. Don't stretch your investments to the extent that you cannot afford to buy milk: We do advise you to save and invest. Yes you do need to stretch a bit and invest to have a secure financial future, but don't stretch to the extent that you break your bones. If your monthly income is Rs 30,000 and your fixed expenses are Rs 15,000, so you cannot afford to invest the entire remaining Rs 15,000 for your long term goals. You need to keep a buffer to meet your upcoming near term non-discretionary as well as discretionary expenses.

4. Invest in Liquid Funds for Liquid Expenses: Do not invest in bank fixed deposits or PPF for short term expenses, because you may not be able to access the money, when you need it, or even if you do, you may incur a penalty on withdrawal. Do not keep your money at home or in your bank saving account either, as they will give you zero or meagre returns which will not even cover the cost of inflation. Invest these funds in Liquid Funds, so that you can withdraw the money whenever you need plus you get the benefit of yielding higher returns as compared with the above mentioned options.

5. Do not take Risk for short term goals: When it is about short term goals, it is advisable to stay away from volatile asset classes. For short term goals, the factors to consider are Liquidity, Safety of principal and Taxation. So there are two options which can provide you liquidity, safety and returns that are better than the traditional bank saving deposits. One is Liquid Fund in the Debt category and the other one is Arbitrage Fund in the Equity category. Arbitrage Funds, though are Equity funds, but they are least volatile and their returns are comparable with Liquid Funds, and they may offer certain tax benefits. The choice between Arbitrage funds and Liquid Funds should be made depending on your income profile after consulting with your financial advisor.

So, the bottomline is, Financial Planning is very important to keep your finances organized and lead a peaceful life. But peace can come only when you plan for both short and long term term. Planning only for the long term and ignoring the short term can break the constant of your life every now and then.

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Asset Class is a often used word in finance, especially investment & portfolio management. We also used the term many times in our articles. In this article a take a academic look at the various asset classes.

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.

What is a STP?
STP is the facility that allows an investor to regularly transfer (i.e. switch) a pre-defined amount from one mutual fund scheme into another scheme. Every month on a specified date an amount you choose is transfered from one mutual fund scheme, called as the Transferor scheme, to another mutual fund scheme, called as the Transferee scheme, of your choice. The STP is similar to a Switch transaction with the difference that it is regularly done at the predefined frequency. The STPs are generally used by investors to create regular cash flows between different schemes for meeting portfolio management objectives or as part of financial planning for certain objectives /goals. The following graph clearly depicts what an STP looks like.

Options available under STP:
There are certain additional options offered by mutual funds within STP. As far as time intervals are concerned, the 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 Plan: Wherein specific fixed amount of money can be transferred.

Capital Appreciation Plan: Wherein only the amount of capital appreciation only can be transferred and the initial investment stays protected. This option is available only under growth option and not dividend plan. One thing that investors need to keep in mind is the amount of load applicable would generally be similar as if there is a redemption from the Transferor scheme and a new investment in the transferee scheme. The tax treatment would also be on same lines.

Ways how you can use STP in your lives:
STP can help meet your portfolio management needs for achieving any temporary or long term investment objective. It is one of the many ways available for planning regular cash flows between different schemes, different asset class or scheme types. The following real life situations can help you realise the ways in which STP can be planned

1. Mr. Vikramsingh has received good bonus and he plans to invest same into equity mutual funds instead of keeping money in bank but is cautious of investing lump-sum into equity schemes.
2. Mr. Imran has just retired from his private job and he plans to invest in debt schemes. However, he desires to set aside some money regularly into equities to also create some wealth.
3. Mrs. Ramakant has a sizable investment in equity. He however wants ensure that the appreciation on this equity investment be set aside into debt to also slowly build a debt portfolio while keeping the equity portion intact.
4. The wedding of Mr. Suraj's daughter is due in the next 2 years. He already has adequate equity investment but he feels the need to protect the investment from market risk.
5. Mrs. Desai wants to keep maintain a fixed asset allocation on her mutual fund portfolio and is looking for a way to do that periodically. In each of these multiple scenarios, STP can be effectively used to meet your investment objectives. The STP can be a very powerful facility if we can smartly use it and incorporate it as per our portfolio and investment needs. It can potentially play a very critical role as part of a holistic financial planning for your family.

STP: Tool for Investment Strategy
As a tool, the STP facility can be effectively used to meet diverse investment objectives, financial planning needs. Some of the ways it can be used is:

A Portfolio Rebalancing and/or Asset Allocation Management tool To minimise risk of investing lump-sum in equity schemes Create debt or equity investment portfolio with time where your primary investment is in the opposite asset class To meet financial goal planning objectives like emergency funds, provisioning for maturing goal, creating wealth, reducing portfolio risks, etc.

The STP option works wonderfully when we have an STP from a Debt scheme > to a Equity Scheme. This option can be exercised when your risk appetite for equity is low or markets are volatile or the market valuations appear fair or overvalued wherein there might be some risk in the short-term. In all such situations, lump-sum investment can be confidently made in debt portfolio with a STP into equity scheme. This will work like an SIP into equity scheme while ensuring that your money is invested into a more productive instrument than bank deposit. While planning for maturing financial /life goals, STP can also be used to slowly transfer money from equity schemes to debt schemes. For eg. If you need say Rs. 25 lakh in say 2 years time, you may start an STP from an equity scheme of say Rs.1 lakh today. The idea behind this is to ensure that at the time of maturity you do not carry any risk on the amount that you need by keeping same exposed to equity market volatility.

Way forward:
These are times when as investors we should be adequately informed and aware of the options & facilities available to us. We also need to take efforts to understand these options /facilities and how they can help us in achieving our financial objectives in a better way. The STP is one such important facility. A single STP can be seen as a combination of SIP, SWP or Switch. It is upto you and your financial advisor to explore the full potential of this valuable feature available exclusively in mutual funds schemes. We should be open incorporate this to manage our wealth and thus our lives in a better way. We hope, the next time you are thinking of managing your portfolio, the idea of STP shall definitely cross your mind.

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