You will be tempted to eat all the laddoos if they are lying in your plate in front of you. Likewise the extra money or year end bonus in our pocket will prick you until you spend it. Right isn't it?
The financial year has come to an end and we have got our annual bonuses. The same question of 'what to do with the bonus' arises every year. Should I buy a car? Should I go for a vacation? Should I pay off my huge credit card debt? Should I repay my home loan? Should I buy that new mobile? And the list goes on...
Bonus, like laddoos, tempts us to do something about it which might not be the right thing to do, especially if you are diabetic or in financial sense, not doing well enough. Take a pause; remember that you have earned that bonus through hard work not luck and hence it shouldn't be ruined for fun and luxury. Proper planning is strongly recommended for your bonus and one should be careful to not get carried away by emotions. Else, pretty soon we may realize that the bonus is gone and then regret.

What Not To Do?

Before going on to what we should do with our bonus, let's discuss the things which we should not do with our bonus...

• Keeping in the Bank Account: Often we find the bonus keeps lying into your bank account for long and you do nothing about them. Slowly, it gets eaten up by card payments and regular expenses... what a waste! We say “don't keep your bonus in the bank account”. A grace of say 10 days can be given before you can plan and deploy your funds elsewhere.

• Investing before clearing high interest loans: Do not rush into making investments before paying off obligations like credit card debt or a personal loan. They should ideally be repaid before investing the money, since the cost of such debt might be higher than the return on investments. Be careful though in not rushing to repay your home loan as it has some income tax benefits also to be factored before deciding to invest or repay.

• Big Purchases or Vacations: You will not achieve anything by blowing up your bonus in a vacation or a big TV. You'll cherish such things in the short run. But you have to secure yourself financially for long term pleasure. But at end of the day, it is also a question of personal affordability for such expenses and you need approval for the same, not from you, but preferably from your financial advisor...

What To Do?

Now, we know what we shouldn't be doing with our bonus. The question of what we should do with the bonus is answered below:

1. Liquid Mutual Funds: As an immediate first step, you might want to put your money to good use without any risk and with adequate liquidity … look no further than liquid mutual fund schemes. Instead of keeping your money in bank, you might not want to plan /research before properly investing. Liquid funds can also be of great advantage when you decide on equity mutual fund schemes to invest as you can then request a STP or Systematic Transfer Plan or a switch to any other schemes. An STP from a liquid fund to an equity fund is like an SIP in the equity fund where you lower the risk of lumpsum investing while generating returns on investments lying in liquid funds.

2. Invest, Invest and Invest: Ideally, more than 50% of your bonus should be invested. Keep your expense list down. Make a list of the investment avenues, where you will put your money. However, you should prioritize a few expenses like high interest bearing debt or some other important personal or family commitments. Depending on your asset allocation or your financial goals, you must invest some part of your bonus into equity funds.

3. Contribute to Retirement & Emergency Funds: You don't receive large sums of money everyday. Hence, one should be extra careful to allocate some part of your bonus to your yearly retirement fund. Remember that retirement is the biggest financial goal that you have for yourself. Small contributions made early in your life will give compounded returns to fill your retirement fund gap. The retirement savings will also help you as well as save taxes for the year, depending on your product choice. In addition, some money can also be parked as an emergency fund (preferably in liquid /short term debt funds) in case you do not already have one...

4. Start tax saving ELSS investments: This is the best time of the year to invest money in ELSS and other tax saving schemes. You have the time to plan, you can foresee your incomes and obligations and you have your bonus. So it's best to shift your tax burden from end of the year, when you might take wrong decisions because of lack of time or money, to now when you have both.

5. Relax: Since It's your bonus, you have the right to savor and enjoy it just like laddoos. The same should however be at a moderate level which is affordable, justified and which does not compromise your financial situation. At the end of the day, the positives or benefits from using your bonus must out weight the negatives or spendings you do. As a rule, you can keep maximum of 20% of net bonus received or 10% of your net annual income (whichever lower) as your upper limit of spending.

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.

Thanks to the consistent marketing efforts by the industry, today SIP or Systematic Investment Plan have become a familiar term for investors. More people are now beginning to explore the savings route through SIPs. But as an investor, one should know that SIP is just one route or facility of investing. Likewise, there are also other facilities offered by mutual funds to investors to invest, redeem or switch between investments, which are relatively unknown. We shall be exploring these facilities in detail in the future newsletter issues. In this issue, we will talk about Systematic Withdrawal Plan or SWP.

What is SWP?

A SWP is a facility that allows an investor to withdraw money (redeem units) from an existing mutual fund scheme at defined time intervals. Thus, the SWP is something opposite or reverse of a SIP where periodic investments are made into the scheme. The SWPs are used by investors to create a regular flow of income from their investments for meeting various life objectives.

SWP Options:

There are certain additional options offered by mutual funds within SWP. As far as time intervals are concerned, the frequency 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 Withdrawal: Wherein specific amount of money can be withdrawn.
Appreciation Withdrawal: Wherein amount of appreciation only can be withdrawn.

Ways how you can use SWP in your lives:

SWP can help meet your cash-flow requirements for achieving any temporary or long term objective. It is one of the many ways available for planning regular income from savings. The following real life situations can help you realise the ways in which SWP can be planned

1. Mr. Amitabh will be retiring very soon. Post retirement he wants a steady income flow into his account.
2. Mrs. Kavita plans to take a break from work for a year to bring up her first child. She is exited and wants a steady inflow from her investments during this period.
3. Mr. Kishore has recently married and wants to create a perpetual cash flow for his wife while keep investment capital intact.
4. Mr. Banerjee is planning an investment in his son's name with regular withdrawals to fund his regular pocket money and tuition fees needs.

As we can see, SWP can be a very powerful facility which can be used smartly to meet your cash flow needs. It can potentially play a very critical role as part of a holistic financial planning for your family.

SWP: Tool for Investment Strategy

There are specific ways in which SWP can be smartly used to manage your wealth as well as cash flow requirement. If we can carefully manage the amount of SWP with the returns or appreciation expectation, we can strike a smart balance between periodic cash flow on one hand and capital appreciation/ reduction on the other hand. For financial planners, its a great tool to play with...

Stategy 1: Regular cash-flow keeping Principal Intact:

This is the simple strategy where the the option of 'appreciation withdrawal' is exercised for SWP. Thus, the withdrawal amount changes to adjust for the “appreciation” or gain made on the amount invested. In this way your capital stays invested while you continue to enjoy the gains periodically.

For example: Amount Invested R5 lac. Expected returns 9%. Monthly withdrawal option: Appreciation only meaning any amount over 5 lac will be to the investor on the selected periodic intervals. The main investment remains intact.

Strategy 2: Creating Perpetual Cash-flow:

This is the advanced version of strategy, wherein a 'fixed' withdrawal amount is kept lower than the expected returns or appreciation. So if expected returns is say 9%, you will be withdrawing below 9% every year. This way, a perpetual cash flow is ensured with lump-sum capital staying intact.

For example, if scheme “X” : Amount Invested R5 lac. Expected returns 9%. Monthly withdrawal: R3,000/- short of 9% yearly. This would create a perpetual cash flow of R3,000/- with invested capital staying intact or increasing slightly. An extension to this strategy is that if you have a big investment capital and mush smaller withdrawals, you may be able to increase your withdrawal amount every year and still continue to enjoy outflow for a longer period of time. A real life scenario for such a case would be retirement where the growing annuity would be needed to adjust for inflation. The other option would be to keep withdrawal constant, then you would be able to increase the value of your investment.

Comparison with other products:

Let us now compare the SWP option with some of the other products in market which offer regular income option.

Unfortunately, looking at the above comparisons, we can confidently say that there is not enough savings products or options available that is worth comparing to the SWP option in a mutual fund scheme. The popular SCSS and POMIS products may offer fixed returns but they also have limitations in terms of amount, period, mode of holding along with the inconvenience and operational hassles. Mutual funds which also offer debt and money market schemes can potentially deliver better post tax-returns, in addition to the many other advantages.

Way forward:

Times are changing. As investors, we need to take efforts to understand the options /facilities available to us and be open to incorporating these ideas to manage our wealth and our lives in a better way. SWP is one strategy that really helps you meet your consumption or cash-flow needs. Perhaps SWP is as important a tool for managing redemption or withdrawal of money as SIP is important for investing. We hope, the next time you are thinking of withdrawals, the idea of SWP shall cross your mind.

India is a blessed land where gurus have preached the path of self-realisation and enlightenment for aeons. Lord Budhha, the revered founder of Buddhism, is one such name from ancient India who spent nearly 45 years spreading his teachings. These teachings are timeless and are as relevant today as they have ever been.

Interestingly, the lessons of living and life, are even relevant to investors. Beyond the world of financial jargon, technicalities, strategies and plans, there exists a world full of rich spiritual wisdom which can be applied to the investing world. In this article, we look at some of the Buddha’s words as guiding lights on investment matters.

On Discipline:

• “A jug fills drop by drop.” Small, regular and consistent investments go a long way in building wealth.
• “The trouble is, you think you have time.” The smart investors do not procrastinate and always act with a sense of urgency.
• “The person who masters himself through self-control and discipline is truly undefeatable.” Truly, a dedicated person with control on his spendings and discipline to follow his investment plans can overcome any financial challenges.
• “If you are facing in the right direction, all you need to do is keep on walking.” Having the right financial plan or investment strategy is the most important, all that remains after that is following it diligently.

On Behaviour:

• “Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.” Any financial decision has to be based on your present scenario, not past event or future predictions.
• “The root of suffering is attachment.” The biggest of the losses to investors come from their own biases and opinions, leading to irrational decisions, based on emotions.
• “Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.” The investor should always follow his own plans and not be affected by market noise, herd behaviour, avoid FOMO (fear of missing out) or what others say unless there is sound reasoning for the same.
• “What lies behind us and what lies before us are tiny matters compared to what lies within us.” Clearly, our potential to build our financial well-being is much more than probably what we have achieved or what we think we can achieve.

On Action:

• “Work out your own salvation. Do not depend on others.” Clearly, one has to avoid debt and be financially independent. One should strive for his own financial well-being and not expect others will take care of you, even your children, especially in old age.
• “An idea that is developed and put into action is more important than an idea that exists only as an idea.” No virtual plans or strategies or dreams hold any value till the time action is initiated for the same. Working towards your plans and having timely execution is the key.
• “What you think, you become. What you feel, you attract. What you imagine, you create.” Before actions, come thoughts, ideas and imagination. Having the right kind of thinking and the right set of people you interact with will also impact your actions and ultimately your success.

On Success:

• “There are no secrets to success. It is the result of preparation, hard work and learning from failure.” The quality of your plans, your knowledge, your learnings from your past experiences and actions that you take would help determine your success.
• “It is better to travel well than to arrive.” The financial well-being is not a destination but a journey to be enjoyed. Even if one achieves a targetted amount of wealth, that is not the end of it as one has to manage the same.
• “To conquer oneself is a greater task than conquering others.” There is no standard for success and one can only be seen as a success or failure according to his own expectations. We should all aim for our own personal level of success and happiness rather than compare the targets which others have set for themselves.
• “Health is the greatest gift, contentment the greatest wealth, faithfulness the best relationship.” Any amount of absolute wealth may not add anything to your happiness. One who lives within his means and is content is wealthy. True happiness can come when you are healthy and you share your life’s journey with people whom you trust.

Final words:

The title Budhha, meaning ‘Awakened One’ or the ‘Enlightened One’, was bestowed on Gautama as he taught from his insights into ‘dukhha’ (suffering) and the end of same, by achieving a state of ‘nirvana’. Buddha, in turn, is derived from the words “buddhi” which literally means ‘intellect’, ‘intelligence’ or ‘wisdom’. It would be wise as investors if we also learn from this wisdom and apply them to in our lives as we walk the small path of our own financial independence or nirvana.

Sometimes it is good to have some mental laws framed in our minds. These laws when practiced in our lives has the power to influence our life and make it better. Strong personalities always abide by some rules/laws of their own. Living life without personal laws does not sound exciting and it indicates that you do not have a strong character, dreams or strong beliefs. Here are a few laws which you can think of adopting in your own lives:

[1] Law of Failure: By failing to plan, you plan to fail. Having no plans or goals in life means having a life devoid of achievements and successes.Plans can be made for every aspect in your life, be it studies, career, relationships, life events/goals or financial well being – no matter how big or small they are. Make it a law to plan for everything in life from life goals/events to monthly budgets.

[2] Law of Belief: Whatever you believe, becomes your reality. Your actions, feelings and intuitions will be guided by your beliefs. It is said that mountains can be moved if you truly believe and there was a man who actually did that. Make it a law to believe in yourself and the things which you dream of today, will be yours sometime in the future.

[3] Law of Sowing & Reaping: As you sow, so shall you reap. This is true for relationships, businesses and even investments. The quality of your life, relationships or financial well-being at any given moment, is a result of what you have done in the past. Make it a law to sow only good deeds and make only good decisions in life for a better future.

[4] Law of Accumulation: Every single thing you do, positive or negative, accumulates. Everything that you do, you tend to repeat, and things that are repeated over time will become your habits, and it is habits that influence and shape your life. Make a law to do and accumulate good actions and avoid the bad ones.

[5] Law of Attraction: You will always get attracted to people and circumstances that are in harmony with your dominant thoughts, whether positive or negative. Whatever you think about, you imbibe into your life. Make it a law to think about only positive aspects, people and outcomes in your life.

[6] Law of Cause & Effect: Everything that happens in life has a cause behind it. Every success or failure is the Effect of a cause. Success & failures do not happen by accident. Make it a law to set good causes/action into motion.

[7] Law of Creativity: You are limited only by your imagination. All positive changes and progress in your life begins with new ideas. The supply of ideas and innovation guides your potential. Once you have unlimited -ow of ideas, your potential too becomes unlimited. A big part of your happiness, success, relationships and future depends on the quality and quantity of the ideas that you have. Make it a law to generate quality ideas.

[8] Law of Control: You feel positive about yourself to the extent you feel you are in control of your own life. If you do not hold the strings of your life, you tend to become weak. Make it a law to get your entire life in your control.

[9] Law of Emotion: Every human decision is likely to be based on an emotion. Stronger emotions tend to dominate the weaker ones, which in turn will determine your decisions and actions, more than rationale. Make it a law to keep your emotions in check and not let any particular emotion dominate while taking a decision.

[10] Law of Luck: The more you work hard, the more lucky you become. There is no pure luck or chance worth waiting for in life. Once we are focused, committed and work hard, luck shines upon us. Make it a law to do more hard work to be lucky.

[11] Law of Destiny: When you truly work towards achieving something, the whole world conspires to help you get it. If you are dedicated to a single cause so much so as to make it your only passion, your life, then there is nothing in this world, that can stop you. You will find that slowly everything will start falling in place. Make it a law to have your own future and destiny decided to act whole-heartedly towards it.

[12] Law of Memory: If you do not repeat soon what you have learnt you will easily forget. But if you practice, do what you have learnt, you will remember it for long. This is true for any knowledge or skill that you learn in life. Make it a law to repeat and to practice what you have learnt.

[13] Law of Use: Whatever talent, ability, or gift you possess becomes stronger and better with exercise. If you don't use it, you lose it. This is the reason why most gifts and skills which we had as children tend to disappear with time. Make it a law to use your gifts and skills often and to not lose them with time.

[14] Law of Reaction: For an action, there would be a reaction. Every action of yours, be it good/positive or bad/negative will tend to have a similar reaction. Even if the reaction is not visible, there will be an impression made which will be hard to erase in life. Make it a law to take actions which brighten your's and others' lives.

[15] Law of Time: Each one of us has the same number of minutes and hours. But the actions and work done varies from person to person. The idea is to manage time and work effectively, in a way that there is little spare or idle time left. This will make sure the time needed to do a particular task keeps reducing, while the number of tasks done keeps increasing.

[16] Law of Company: You become the company you keep. You tend to think, act, behave and even dream similar to your company. Having an intelligent, aspirational and motivating company will inspire you to grow yourself into a better person. Make it a law to have a company of people similar to what you aspire to become.

[17] Law of Compensation: You are always compensated in more than equal measure for what you do. The more you give, the more you get. As long as you are doing good for other people, others will do good for you.

[18] Law of Expectations: What you expect is what you get. You do not get what you want or desire but what you expect. Expectations though have to be grounded on reality. If your expectations are just and well placed, you will get what you deserve and you will not be disappointed. Make it a law to have realistic expectations in life.

[19] Law of Karma: Keep doing good deeds without expecting fruits. Your hard work and good deeds will eventually pay o and you will enjoy the true fruits of labour. However, doing something while keeping results in mind might obstruct your vision. Make it is a law to do good without worrying about fruits.

[20] Law of Forgiveness: Bad experiences, pains, grievances and complaints are only burdens that you tend to carry unknowingly. You are mentally healthy to the degree to which you can forgive and forget. Your willingness to forgive others and to let go of the past grievances is the single most important determinant of whether or not you are free of burdens to act optimally with utmost freedom. Make it a law to not carry any burdens in life.

[21] Law of Habit: Your actions repeated over time become your habits and your habits in turn de fine your character. Your character ultimately shapes your destiny. In the absence of a specifi c decision on your part to change an aspect of your life, the natural tendency will be to go on the same way inde finitely. Make it a law to make good habits in life to transform your life over time.

[22] Law of Subconscious Mind: The subconscious mind is a powerful tool and when used properly can do wonders. It goes to work immediately on whatever you plant in your mind to bring it into reality. The subconscious mind makes all words and actions t in a pattern consistent with your self-concept and your dominant goals in life. Whether positive or negative, good or bad, if you hold an image continuously, make it emotional, and visualize it in your conscious mind, it will begin to organize everything around you to make it come true. Make it a law to create and shape yourself in your subconscious mind.