Dear Sir,
I am 58 years and recently retired from my employment. My PF amounts to Rs 1 Cr and i want to invest in Mutual Funds instead of keeping the money in the EPF account.
Sir, i will need Rs 45,000 monthly for my monthly expsnses and thanks to your education, got to know about SWP.
Sir, please advice how do i go about investing in terms of selecting funds and what amount in these funds. Will the corpus last me for 25 yrs at the monthly withdrawal rate of Rs 45,000. If it can last for 25 yrs, what will be my corpus at the end of 25 yrs.
Thank you and anxiously look forward to your reply
Best Regards & God bless
Ans: It’s great that you’ve accumulated Rs. 1 crore in your PF account. You’re thinking of moving this to mutual funds, and that’s a wise choice considering your long-term goals. Your monthly need is Rs. 45,000, and you’ve rightly pointed out the use of a Systematic Withdrawal Plan (SWP) to meet these expenses.
Investment Objective
Your primary goal is to generate Rs. 45,000 per month for your expenses while ensuring your corpus lasts for 25 years. You’re also interested in knowing whether there will be any remaining corpus at the end of this period.
SWP Strategy Overview
An SWP allows you to withdraw a fixed amount monthly while the rest of your investment continues to grow. The key is to select funds that provide a balance between growth and stability.
Selecting Mutual Funds
Equity Funds:
These funds provide higher returns, helping your corpus grow over time. However, they come with market risks. For long-term growth, equity funds in large-cap and multi-cap categories are preferable.
Hybrid Funds:
Hybrid funds offer a mix of equity and debt. They provide a balanced approach by offering moderate growth with lower risk compared to pure equity funds.
Debt Funds:
Debt funds are more stable but offer lower returns. They can act as a cushion, providing stability to your overall portfolio.
Asset Allocation
Given your goal and time horizon, a balanced approach is essential. You may consider the following allocation:
50% in Equity Funds:
This portion will help your corpus grow, keeping pace with inflation.
30% in Hybrid Funds:
Hybrid funds add stability and moderate growth, reducing volatility.
20% in Debt Funds:
Debt funds ensure a safety net, providing consistent returns without much risk.
Implementing the SWP
Start with Debt Funds:
Begin your SWP withdrawals from the debt portion. This ensures you’re not selling equity when the market is down.
Rebalance Annually:
Every year, review your portfolio. Rebalance it to maintain your desired asset allocation. This ensures that your funds are neither too risky nor too conservative.
Ensuring the Corpus Lasts for 25 Years
Return Expectations:
Assuming an average annual return of 8-10% from the portfolio, this approach should provide you with a stable monthly income.
Corpus Depletion:
Your corpus is likely to last for 25 years with this strategy. However, it’s important to monitor and adjust withdrawals according to the portfolio’s performance.
Estimating the Corpus at the End of 25 Years
Growth Potential:
While you’ll be withdrawing Rs. 45,000 per month, the remaining amount continues to grow. After 25 years, there may still be a significant corpus left, depending on the performance of the equity and hybrid funds.
Risk Management
Inflation Consideration:
Inflation will reduce the purchasing power of your Rs. 45,000 over time. It’s essential to review and adjust your SWP periodically to account for inflation.
Health Insurance:
Ensure you have adequate health insurance to cover medical emergencies. This prevents you from dipping into your corpus.
Emergency Fund:
Maintain an emergency fund outside of your investments. This covers unexpected expenses and reduces the need to withdraw from your mutual funds at an inopportune time.
Tax Efficiency
Taxation on SWP:
SWP from mutual funds is subject to capital gains tax. Equity funds are taxed at 12.5% for long-term gains over Rs. 1.25 lakh. Debt funds are taxed at the slab rate only for the gain to the extent withdrawn. Plan your withdrawals keeping tax implications in mind to maximize your net returns.
Finally
Investing your Rs. 1 crore PF corpus in a well-balanced mutual fund portfolio is a sound decision. By carefully selecting funds and implementing a disciplined SWP strategy, you can ensure that your corpus lasts for 25 years, providing you with a steady monthly income. Regular monitoring and adjustments will help you stay on track, and with careful planning, you may even have a significant corpus left at the end of 25 years.
Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in