I am 60 with saving in mutual funds around 80 lakh . i want to withdraw 1 lakh per month as my pension. will there be any capital gain.

Ans: If you withdraw Rs 1 lakh per month from MF scheme even delivering linear return of 8% annually (which is not possible at all as returns on MFs are market linked and fluctuates), your savings in mutual funds may exhaust in around 10 Years time. In equity oriented MFs (65% or more equity), investments withdrawn on FIFO basis are taxable as short term capital gain (Taxed at 20%) for < 1 Year and Long term capital gain (Taxed at 12.5% flat, if LTCG exceed Rs 125000 in a year) for > 1 year investments. Short Term Capital Gains on Debt funds < 24 months are taxed at applicable slab rates and > 24 months LTCG at 12.50%.

Ans: You’ve accumulated Rs 20 lakhs for your retirement, and you’re willing to invest it with a five-year horizon. This time frame, though relatively short, can still allow for reasonable growth if invested wisely. At the age of 66, balancing growth and safety is key.

Understanding Your Risk Tolerance
Moderate Risk Approach: At your age, it’s prudent to avoid high-risk investments. However, moderate risk exposure is necessary to generate inflation-beating returns.

Capital Preservation with Growth: You want to grow your funds but also ensure the preservation of your capital. The goal should be to strike the right balance between safety and returns.

Diversified Portfolio for Stability
Combination of Equity and Debt: A good strategy would be a 50-60% allocation to debt and the rest in equity. Debt mutual funds provide stability, while equity funds offer potential growth.

Avoid Full Equity Exposure: Considering your age and time horizon, avoiding complete exposure to equity is important. While equity can generate high returns, it can also be volatile, which may not align with your objective.

Choosing Debt Mutual Funds
Low to Moderate Risk Debt Funds: You should consider investing in low to moderate risk debt mutual funds. These funds offer stability and reasonable returns over a five-year period, helping protect your capital from market volatility.

Taxation Advantage: Debt mutual funds are taxed as per your income tax slab, and long-term gains can be more tax-efficient if held for over three years. This provides a dual benefit of stable returns and tax savings.

Adding Some Equity for Growth
Actively Managed Equity Funds: To outpace inflation and achieve decent returns over five years, you can invest a small portion in actively managed equity funds. These funds allow flexibility and the potential for higher growth than traditional options.

Avoid Index Funds: While index funds have lower costs, they simply mirror the market’s performance. For a time horizon like five years, actively managed funds are better suited as they can adapt to market conditions and aim to outperform.

Opt for Regular Plans Over Direct Funds
Benefits of Regular Funds: Although direct funds have lower expense ratios, they lack the personalized advice you get from investing through a Mutual Fund Distributor with a Certified Financial Planner. Their expertise can make a difference in the performance and structure of your portfolio.

Professional Guidance: The cost difference between direct and regular plans is minimal when compared to the benefits of professional advice, including regular reviews, rebalancing, and timely switches to better-performing funds.

Focus on Liquidity and Flexibility
Short-Term Liquidity: Though your investment horizon is five years, it’s wise to ensure some liquidity for unforeseen expenses. Consider keeping a portion of your funds in a liquid mutual fund or short-term debt fund, which can be accessed easily in case of an emergency.

Flexibility of Mutual Funds: One of the advantages of mutual funds is the ease with which you can withdraw or switch funds based on your financial situation. This flexibility is crucial as you may need to adjust your investments over the five years.

Systematic Withdrawal Plan (SWP)
Plan for Withdrawals: As you approach the end of your investment horizon, consider setting up a Systematic Withdrawal Plan (SWP). This allows you to withdraw a fixed amount monthly while your corpus continues to generate returns.

Minimise Tax Impact: An SWP is a tax-efficient way of withdrawing funds. Since only the gains are taxed, the tax burden is lighter compared to lump-sum withdrawals.

Wealth Protection Through Insurance
Ensure Adequate Health Insurance: At 66, having comprehensive health insurance is vital. It helps protect your investments from being depleted by medical expenses. Ensure that your health insurance coverage is sufficient, and review it regularly to keep pace with medical inflation.

Life Insurance is Not a Priority: Since your primary goal is capital preservation and growth, life insurance isn’t a focus at this stage. Instead, ensure that your existing policies (if any) are aligned with your current needs.

Review and Rebalance Annually
Monitor Portfolio Performance: It’s important to review your portfolio every year. If any of your funds underperform or market conditions change, a Certified Financial Planner can guide you to rebalance and realign your investments.

Avoid Timing the Market: Stick to your strategy without attempting to time the market. Frequent buying and selling can lead to unnecessary taxes and missed growth opportunities.

Stay Disciplined and Focus on Your Goal
Discipline is Key: The most important factor in any investment strategy is discipline. Stay committed to your investment plan for the full five-year period to allow your money to grow optimally.

Avoid Panic During Market Fluctuations: Markets can be volatile, especially when you have an equity component in your portfolio. Avoid making hasty decisions based on short-term market movements.

Final Insights
To achieve a balanced and growth-oriented portfolio with your Rs 20 lakhs, opt for a mix of equity and debt mutual funds. Prioritise stability while allowing for some growth with a small equity exposure. Regularly review your investments, stay disciplined, and ensure adequate insurance coverage to protect your wealth and financial security.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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