Need Expert Advice?Our Gurus Can Help

Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 24, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Oct 23, 2024Hindi

I am 42 yrs old IT professional, looking for early retirement. Have 32 lakhs in MF, 30 lakhs in PF and 18 lakhs in PPF which is maturing next year. My q is can I invest 30+18 = 48 lakhs in SWP and can start withdrawing from day 1 ? What is the max amount I can withdraw per month from this 80 lakh corpus ? (32 lakh MF invested from last 1 yr + 48 lakhs in SWP)

Ans: You are in a solid financial position, with Rs 32 lakhs in mutual funds, Rs 30 lakhs in Provident Fund (PF), and Rs 18 lakhs in Public Provident Fund (PPF) maturing next year. This amounts to Rs 80 lakhs in total. You are considering investing Rs 48 lakhs (PF + PPF) in a Systematic Withdrawal Plan (SWP) and want to know how much you can withdraw monthly.

Let’s break down your situation, evaluate the potential of SWP, and suggest an optimal approach.

SWP: An Overview and Suitability
A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed amount from your investments regularly. It’s a reliable way to create an income stream, but starting withdrawals from Day 1 may not be ideal for maximizing long-term returns. Since you are 42 and looking at early retirement, we need to assess whether SWP aligns with your retirement goals.

MF Corpus Growth: Your Rs 32 lakhs invested in mutual funds for only one year means it hasn’t had enough time to grow significantly. Ideally, investments need 3-5 years to harness the power of compounding.

SWP from Day 1: Starting SWP immediately from Rs 48 lakhs might limit the growth potential of your corpus, especially if market returns are volatile in the short term.

Understanding Withdrawal Rates
The most important factor in SWP is the withdrawal rate. Withdraw too much, and you risk depleting your corpus early. A sustainable withdrawal rate is around 4-6% annually.

Rs 80 Lakh Corpus: If you plan to withdraw Rs 48 lakhs via SWP and combine it with your Rs 32 lakh MF corpus, the total amount available is Rs 80 lakhs. With this, let’s assess possible withdrawal amounts:

4% Withdrawal Rate: You can withdraw about Rs 3.2 lakhs per year, which is around Rs 26,000 per month.

5% Withdrawal Rate: You can withdraw Rs 4 lakhs per year, which is Rs 33,000 per month.

6% Withdrawal Rate: You can withdraw Rs 4.8 lakhs per year, which comes to Rs 40,000 per month.

While these amounts seem manageable, remember that withdrawing too much can deplete your corpus too soon. It’s wise to start with a conservative rate, allowing your remaining investments to grow and generate returns.

Balancing Growth and Withdrawals
Growth Consideration: The Rs 32 lakh invested in mutual funds for the last year needs more time to generate substantial returns. I would recommend not immediately withdrawing from this corpus, giving it 3-5 years for better growth potential.

Inflation: Inflation will impact your purchasing power. So, a higher withdrawal rate may seem attractive now, but it can reduce the longevity of your corpus. Withdrawing at 6% per annum is aggressive and may lead to running out of funds in the future.

Potential Challenges of Early SWP
Taxation: Equity Mutual Fund gains are taxed differently under the current rules. Short-Term Capital Gains (STCG) are taxed at 20%, and Long-Term Capital Gains (LTCG) over Rs 1.25 lakh are taxed at 12.5%. You should account for these taxes when planning SWP withdrawals.

Market Risk: SWPs depend on the performance of mutual funds, which are market-linked. A market downturn can negatively affect your corpus, which is especially risky when you start withdrawing immediately.

A 360-Degree Solution
Diversify Withdrawals: Rather than withdrawing entirely from SWP, consider creating a diversified income stream. This includes using interest from your PPF and PF and combining it with SWP. This approach reduces the pressure on your mutual fund corpus.

Staggered Withdrawals: If possible, delay withdrawals from your mutual fund corpus for at least 2-3 years. Let the funds grow while you live off the PPF and PF interest income, reducing the stress on your SWP in the early years.

Use Debt Mutual Funds: For your SWP, invest a portion in debt mutual funds to reduce risk. While equity mutual funds offer higher growth, debt mutual funds provide stability and regular returns. This will help balance your overall portfolio.

Disadvantages of SWP from Day 1
Limited Growth Potential: Starting SWP withdrawals immediately limits the time for your corpus to grow. Ideally, a few years of compounding would increase your returns.

Depleting Corpus Early: If the market performs poorly, your regular withdrawals might eat into the principal amount. Over time, this could result in faster depletion of your corpus, especially if you withdraw aggressively.

Tax Impact: You’ll be liable to pay taxes on the gains you withdraw. If your withdrawals push you into a higher tax bracket, it will reduce the net income from your SWP.

Benefits of Actively Managed Funds over Index Funds
Active Funds Outperform in Volatile Markets: Actively managed funds can offer better returns during volatile or bear markets. Fund managers adjust the portfolio based on market conditions, while index funds track a fixed benchmark.

Flexibility in Strategy: Active fund managers have the flexibility to shift between sectors, rebalance portfolios, and use tactical asset allocation to outperform benchmarks.

Potential for Higher Returns: While index funds offer lower fees, actively managed funds have the potential to deliver higher long-term returns, especially when market conditions are favorable.

Final Insights
SWP is a good option for generating regular income, but starting it from Day 1 may limit your future growth potential. A conservative withdrawal rate of 4-5% is advisable to ensure your corpus lasts longer. Delaying withdrawals from your existing Rs 32 lakh mutual fund corpus will give it time to grow and offer higher future returns. Focus on creating a diversified, balanced approach with a mix of equity and debt mutual funds to minimize risks.

Early retirement is achievable with careful planning, but the sustainability of your income stream is key. Consult a Certified Financial Planner to fine-tune your strategy based on your specific retirement goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Asked on - Oct 24, 2024 | Answered on Oct 26, 2024

Thanks , but I dont think withdrawal of interest is allowed from PF or PPF..I think better to put those PPF and PF in mutual funds and then start withdrawing ?

Ans: Correct, interest withdrawal isn’t allowed on PPF or PF until maturity. Transferring these funds to mutual funds after maturity can improve liquidity and provide growth potential. Mutual funds offer flexible withdrawals through Systematic Withdrawal Plans (SWP), creating a sustainable income source.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Asked on - Oct 26, 2024 | Answered on Oct 26, 2024

Correct but that nullifies your previous statement..Transferring 50 lakhs from PF and PPF to MF and then start withdrawing from Day1 will eat whole corpus. Instead here is what I think, work 3 yrs more till 45 (therefore more SIP in MF) and put PPF/PF to FD taking interest of 7% per annum after 3 yrs..what do you advice

Ans: Working an additional three years until age 45 to boost SIP contributions in mutual funds (MF) while keeping your PF and PPF intact can strengthen your retirement corpus. After three years, you can consider transferring your PF/PPF corpus to fixed deposits (FD) for stable returns of around 7% per annum. This approach preserves the principal while generating regular income. You could also make partial withdrawals from PF and PPF as needed, ensuring flexibility without exhausting the corpus immediately. This strategy balances growth with stability, enhancing income sources and protecting your retirement assets effectively.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.