If you are a seafarer (and especially living in India), you may have been quite surprised by the cacophony that a few Mutual Funds (MF) companies and AMFI (Association of Mutual Funds of India) have been created by a plethora of ads in recent months.
The concept of SIP or Systematic Investment Plan has been around for quite some time and was used sparingly by only a few people who were aware of the same. As it usually happens, the very few who understand the concept and the underlying calculations of a systematic plan of investment have gained in the past.
SIP works as a simple concept, by way of which a fixed amount is deducted from your bank account and deposited with the AMC (Mutual Fund Company) to buy units of a Debt or Equity fund. Depending upon the NAV of that day units are credited to your Folio. This works fine for everyone in most cases and gives good returns to those who carry their SIPs through Bull and Bear cycles which means ups and downs of the stock market for a large number of years.
As a Seafarer dedicated to financial planning, I found a few practical difficulties for Seafarers while using SIP :
Firstly you must remember that as a seafarer you have far more investible funds than your shore counterpart. This means that you should have more opportunities to invest and should take more precautions and steps to put your FULL money to FULL use. No money should lie idle anywhere. Even the uncertainties like medical emergencies should be properly quantified and provisioned for. Since we are, by the help of these articles, trying to earn maximum in lesser number of years, we cannot and should not waste money and opportunity of getting a higher return.
Less spreading of investment across time frame: Usually the MF companies offer only monthly SIPs, which means you will be able to purchase only once a month. This means that the day you buy the market may be on a high or on a low or may be a mean. This deprives you of an opportunity to divide your money and buy at more number of times in a month.
Confusion: I also tried setting up 5 SIP’s for the same fund, 1 for every week. This may work fine but it will leave you with a problem of checking your bank account for debiting and your MF Folio for crediting of the amount as there is a small chance of a money transfer getting haywire. Add to this 3 or 4 more funds that you may also start your SIPs into. As you can see that will be quite a large no of transaction to track.
Risk of Bank Balance Running Low: You may have planned some important expenses from your bank account which could be 1 or 2 months away while you are on board. With the SIPs eating away the balance, you will always be scared of not having enough money for the expenses- planned or non-planned.
Difficulty in Stopping a SIP: It has been practically experienced by me that if you wish to stop a SIP for some reason, it takes more than a month and sometimes even 3 months to stop it after giving an application. Also in your schemes of things you may not be able to give that application if you and your spouse are on board. This can be an indeed a difficult situation. With some AMCs, if your SIP was started manually (in offline mode), you will not be able to stop it even if you have online access.
However, there is another concept similar to SIP, which is called STP or Systematic Transfer Plan.
STP or SYSTEMATIC TRANSFER PLAN
Is a process similar to SIP but in this a lump sum is deposited in a debt fund (or can be a equity fund too but is not advised) at one time and a timed transfer of fixed amount can be started from the Debt fund into 1 or more no. of Equity funds. The debt fund selected is usually a Liquid fund or Money market fund since it does not have any entry or exit load.
ADVANTAGES OF STP OVER A SIP
1. Once your Folio has been generated (through an agent or bank) , you can start the STP into the Equity fund of your choice in the Direct mode. This means, that you will not be paying any commission to anyone and your returns will be higher by about 1% p.a.
2. The number of purchases into the Equity fund from your Debt fund can be more than one, i.e. weekly.
3. The no of STPs from the Debt Fund can be started into more no. of Equity funds without creating much confusion. As I have mentioned earlier there will be a real confusion if you wish to set up weekly SIPs if you find more than 1 fund worth investing in the same AMC.
4. Full utilisation of your Salary: Instead of keeping your 2-3 month’s salary in a NRE savings account at pittance interest waiting for investment opportunity or expenses. You can actually keep 1 to 2 months of expenses only in your savings account and move rest of the salary into a Debt fund of any one or more than one AMC. Now from these Debt funds the small investing amounts that you have decided keeps flowing into the Equity funds of your choice every week. The remaining amount will keep earning a higher “return” than the rate of interest it would have earned in a NRE savings or NRE FD.
5. Easy Termination of STPs : In case you need the money for your use, or you feel that the Equity funds have stopped performing well and you wish to stop and watch future performance. All you have to do is simply stop the STP on the AMC website or simply redeem the complete Debt fund.
The money will reach your bank account the very next day and the STP will automatically stop if 3 STPs do not take place.
If you have funds again, such as returning to work and your spouse joining you, you can easily restart the STP. Simply transfer your salary to one or more Debt funds and your STPs will automatically start if it has been less than 3 months. If it has been more than 3 months, you can start fresh STPs in less than 5 minutes on the Mutual Fund website. Even if you choose not to start a STP, your funds will earn a higher return than a savings account, slightly higher than a bank FD, with the flexibility to withdraw without penalties.
For NRIs, there is a TDS deduction for each STP, which may be claimed back in your tax return. For residents, the tax on capital appreciation is still due but not deducted, and must be paid before 31st March.
Debt funds can be redeemed on Day 1 with the amount received in your bank account the next day.
Long-term STP can generate a higher return than SIP, with the majority of your salary earning in Debt and gradually in Equity, despite paying the TDS.
Liquid Funds, Money Market funds, or Gilt funds are recommended as the parent fund for STPs, depending on the Fund house of the Equity funds you choose.
It’s important to understand the limitations and regulations that come with investing, and to adapt accordingly to maximize returns.
Note: The financial products mentioned may vary by country, so it’s recommended to research and find similar products in your region for future planning. Please provide the content that needs to be rewritten.