When one learns how to drive, steering the car in the reverse gear is quite challenging. But it's undeniable that in order to master driving, you must also learn the skill of moving the car backwards. Investing through SIPs has a similar case. If you are investing towards a long-term goal through SIPs, that's great. But if you want to realise your goal most efficiently, investing through SIPs alone isn't enough. You also need to have a withdrawal plan.
Why a withdrawal plan? Why can't you just sell off your investment just when you arrive at a long-term goal such as your kid's college education? You could do so if the market guaranteed it to you that it won't shave off a few percentage points from your accumulated returns. Markets, as we know them, are highly volatile. This volatility could hit you just when you don't want it to. Hence, there is a need for a withdrawal plan.
This 'withdrawal' plan is nothing but an SIP from an equity fund to a more conservative fund. When you move money between two funds systematically, that's called a systematic transfer plan (STP). Since this STP is meant to protect your accumulated corpus, it should move the corpus accumulated in an equity fund to a more conservative fund, generally a short-duration debt fund.
Let's say you are accumulating corpus for your kid's higher education. For that, you are investing in a good multi-cap fund through SIPs. Around 12-18 months before you are going to need the corpus, you should start moving the accumulated sum to a short-duration debt fund. Since a short-duration debt fund is largely stable, you can expect it to preserve your capital till the time you actually need it, of course with its normal 6-7 per cent returns as well.
What about retirement, where you don't need the retirement corpus all at once? First focus on the income part. The money that you are going to need in the next three years can be moved to a short-duration fund through an STP. This money will serve your regular-income requirements.
Second, focus on beating inflation. In order to do that, park the rest of your retirement corpus in a couple of good aggressive hybrid funds, again through an STP. Aggressive hybrid funds have 65-80 per cent equity allocation, with the rest parked in debt. They provide equity-like returns at comparatively lower volatility and hence are ideal for most retirees. After every two years, move funds from aggressive hybrid funds to short-duration debt funds through STPs.
Note that when you set up an STP, both the sending and receiving funds must be from the same fund house. Speak to your financial advisor if you face any confusions regarding the transfers.