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Ramalingam

Ramalingam Kalirajan  |7014 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 10, 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
Ashish Question by Ashish on Nov 09, 2024Hindi
Money

In what manner one can invest the lumpsum amount of his/her retirement corpus, withdraw money on monthly basis through a SWP and also ensure the optimum growth of the corpus despite the withdrwal. For example the corpus is 10000000, monthly amount required to be withdrawn through SWP is 80000, period of investment of the said corpus is 15 years, amount required after 15 years in 30000000. Is it possible?

Ans: Investing a retirement corpus wisely is crucial. The challenge here is twofold: ensuring monthly withdrawals through a Systematic Withdrawal Plan (SWP) while also allowing the remaining corpus to grow over time.

In your case:

Corpus: Rs 1 crore
Monthly Withdrawal: Rs 80,000
Investment Period: 15 years
Target Amount After 15 Years: Rs 3 crore
The key goal is to balance regular income, capital preservation, and growth. Let’s explore how this can be achieved efficiently.

Step 1: Allocation Strategy for Your Corpus
To maintain withdrawals and grow your corpus, a diversified portfolio is recommended. This can be achieved through a combination of debt and equity instruments.

Consider the following allocation:

40% in Debt Mutual Funds: This provides stability and generates consistent returns. Debt funds are less volatile than equity funds, making them ideal for the withdrawal component.

60% in Actively Managed Equity Mutual Funds: These funds offer growth potential, allowing your corpus to appreciate over time. Equity investments will help counter inflation, especially given your goal of increasing your corpus to Rs 3 crore over 15 years.

Step 2: Implementing a Systematic Withdrawal Plan (SWP)
An SWP is a powerful tool that allows you to withdraw a fixed amount monthly from your investment. Here’s how it can work:

Initial Monthly Withdrawal: Rs 80,000 from your debt mutual fund allocation. This ensures your withdrawal needs are met while the equity portion continues to grow.

Annual Increase in Withdrawals: To account for inflation, consider increasing your monthly withdrawal by 5% each year. This adjustment will help maintain your purchasing power over time.

Step 3: Protecting Your Principal and Ensuring Growth
A common concern with SWPs is depleting your principal over time. However, with the right approach, you can sustain withdrawals and still grow your corpus. Here’s how:

Rebalance Annually: Review your portfolio at least once a year. If equity markets perform well, you can shift some gains to debt funds. This ensures you lock in profits while maintaining stability.

Choose Growth Option in Mutual Funds: By choosing the growth option instead of the dividend option, your investments continue to compound, even as you withdraw regularly.

Avoid Direct Funds: Instead of opting for direct plans, investing through a Certified Financial Planner with MFD credentials is more effective. They can offer guidance on fund selection, asset allocation, and tax efficiency.

Step 4: Addressing the Tax Implications
Given the new tax rules, here’s what you need to consider:

Equity Mutual Funds: Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%, while short-term capital gains (STCG) are taxed at 20%.

Debt Mutual Funds: Both LTCG and STCG are taxed according to your income tax slab.

To optimize taxes, you can withdraw primarily from debt funds in the initial years and switch to equity funds later as they become long-term investments. This approach minimizes your tax liability.

Step 5: Creating an Emergency Reserve
Even with a robust plan, unexpected situations can arise. Therefore:

Keep 6 months’ worth of withdrawals (around Rs 4.8 lakh) in a liquid mutual fund or short-term debt fund. This ensures you have quick access to funds without disturbing your main portfolio.

Consider health insurance and other emergency coverage to protect against unforeseen expenses.

Step 6: Addressing Inflation and Future Growth
Inflation erodes purchasing power, especially over long periods. Since your target is Rs 3 crore after 15 years, it’s crucial to adjust for inflation:

Historically, equity investments have beaten inflation over the long term. By keeping a 60% allocation in equity, your portfolio is positioned to grow and potentially outpace inflation.

To further safeguard your financial goal, consider investing a portion in balanced advantage funds or hybrid funds. These dynamically adjust between equity and debt based on market conditions, ensuring optimal returns with lower risk.

Step 7: Monitoring and Reviewing Your Plan
A retirement portfolio needs regular monitoring to ensure it stays on track:

Conduct a portfolio review every 6 months. This helps you assess performance, rebalance if necessary, and adjust your SWP amount in line with inflation.

Stay in touch with your Certified Financial Planner for personalized advice and strategy updates. This will help you stay aligned with your long-term goals.

Finally
Achieving a balance between monthly withdrawals, capital growth, and inflation protection is definitely possible. With the right strategy and regular monitoring, your corpus can continue to support you comfortably.

Focus on:

Diversifying across debt and equity.
Using SWP for consistent income.
Rebalancing periodically.
Staying updated on tax implications.
Building an emergency reserve.
These strategies, if followed diligently, can help you achieve your retirement goal of Rs 3 crore while meeting monthly withdrawals.

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.
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Milind

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Insurance, Stocks, MF, PF Expert - Answered on Sep 22, 2024

Asked by Anonymous - Sep 18, 2024Hindi
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Money
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: Hello;

It would be advisable to invest your corpus lumpsum in hybrid conservative (debt oriented) fund type.

I recommend Kotak hybrid debt fund or SBI conservative hybrid fund both from the same category as mentioned above, suggested based on 5 year returns.

I recommend that you let the corpus compound for 2 years minimum.

Your corpus may grow to 1.17 Cr after 2 years assuming modest return of 8%.

Here if you do a 5% SWP then you may expect a monthly payout of 48750 per month for next 25 years.

At the end of 25 years you can expect a net corpus value of around 3.58 Cr(modest return of 8% considered) after deducting monthly payouts.

Other option for you could be to buy immediate annuity from an insurance company. Considering annuity rate of 6% you may expect to receive monthly payment of 50K from the next month onwards. It has various features for joint holding and return of purchase price after the end of annuity period(25 years for eg) or expiry of the annuity holder, to the nominee.

Do your due diligence and choose the best option suiting to your requirement.

*Investments in mutual funds are subject to market risks. Please read all scheme related documents carefully before investing

Happy Investing!!

..Read more

Latest Questions
Ramalingam

Ramalingam Kalirajan  |7014 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 13, 2024

Asked by Anonymous - Nov 12, 2024Hindi
Money
I am investing 100000 every month as SIP and 50000 annually. My present SIP Corpus is nearly 2Cr. How much is expected to be the total corpus in 2030 if I manage to continue the same investment model.
Ans: I appreciate your consistent commitment to investing. Systematic Investment Plans (SIPs) and annual investments are powerful tools to build substantial wealth over the long term. Your current SIP portfolio is already impressive, and with continued discipline, you are well on your way to achieving significant financial goals by 2030.

Below, I will offer a detailed breakdown of your current investment strategy and provide an in-depth assessment to project where your portfolio could potentially reach by 2030. Additionally, I will share some insights on how you can maximise your investment returns while keeping your tax efficiency in mind.

Let’s explore the factors that will influence your future corpus.

1. Current Investment Strategy: A Strong Foundation
You are currently investing Rs 1,00,000 monthly through SIPs and an additional Rs 50,000 annually.

Your present SIP corpus stands at Rs 2 Crore, which shows your disciplined approach.

Continuing this strategy till 2030 will be highly beneficial, given the power of compounding over time.

The consistent monthly SIP ensures rupee cost averaging, reducing market volatility impact.

2. Estimated Growth of Your SIP Corpus by 2030
Assuming you continue with Rs 1,00,000 monthly SIP and Rs 50,000 annually, your investments will grow significantly.

The market’s historical average returns for equity mutual funds can range between 10% to 15% per annum. However, actual returns can vary due to market conditions.

Compounding will exponentially boost your returns, especially if you remain invested without withdrawals.

By 2030, your SIP portfolio can potentially cross Rs 6 Crore, given stable market conditions.

This estimate considers a conservative growth rate. However, equity markets have been known to outperform during bullish periods.

3. Active Fund Management: The Better Choice
Many investors lean towards index funds, but actively managed funds often outperform in the Indian context.

Active funds have skilled fund managers who adjust portfolios based on market dynamics.

They can exploit opportunities in specific sectors and stocks to generate alpha over benchmarks.

Index funds, while low-cost, are purely passive. They mirror indices without considering market trends.

Actively managed funds may have higher expense ratios, but the potential for superior returns justifies the cost.

Especially in volatile or uncertain markets, active fund management can make a substantial difference.

4. Investing Through a Mutual Fund Distributor (MFD)
Direct funds may seem cost-effective as they have lower expense ratios. However, they lack professional guidance.

Regular funds, managed through an MFD with a Certified Financial Planner (CFP) credential, offer holistic support.

An MFD can help you align your investments with your financial goals, provide tax planning, and adjust your portfolio as needed.

Regular reviews by an MFD ensure your portfolio is optimised for changing market conditions.

Direct funds require you to track performance, handle documentation, and monitor taxation—all on your own.

Engaging with a Certified Financial Planner through MFDs helps you focus on strategy, not execution.

5. Tax Implications: Managing Your Gains Efficiently
The recent tax changes impact equity mutual funds’ gains. Long-term capital gains (LTCG) over Rs 1.25 lakh are taxed at 12.5%.

Short-term gains (STCG) are taxed at 20%, while debt funds’ gains are taxed as per your income slab.

Efficient tax planning is crucial. Consult with your CFP to time redemptions and optimise tax liabilities.

Regular fund investments offer better tax management compared to direct funds, given the advisory support.

6. Market Volatility and Economic Factors
While investing in equity funds, market volatility is a reality. However, the long-term growth potential outweighs short-term fluctuations.

SIPs protect your investments from timing the market. Rupee cost averaging ensures that you buy more units when prices are low.

Focus on staying invested even during market downturns. History shows markets rebound, and long-term investors benefit the most.

With India's economic growth prospects, equity funds have the potential to deliver strong returns in the coming years.

7. Diversification and Portfolio Rebalancing
Continue diversifying within mutual funds to reduce concentration risk.

Allocate your SIPs across large-cap, mid-cap, and multi-cap funds for a balanced approach.

Rebalance your portfolio annually with your Certified Financial Planner to align with changing market conditions.

Consider thematic or sectoral funds cautiously, as they carry higher risks.

Reinvest dividends and gains to harness compounding benefits further.

8. Emergency Fund and Liquidity Considerations
Maintain a separate emergency fund to cover at least 6 months of expenses. This will prevent premature withdrawals from your SIPs.

Avoid liquidating your investments for short-term needs. Instead, use other sources like fixed deposits or liquid funds.

9. Aligning Investments with Financial Goals
Define clear goals, such as retirement planning, children’s education, or buying a property.

Each goal requires a tailored investment approach. For instance, retirement planning should focus on growth funds.

Engage with your Certified Financial Planner for goal-based investment planning.

Long-term SIPs work best when aligned with specific objectives, ensuring a disciplined approach.

10. Tracking and Monitoring Your Investments
Review your portfolio semi-annually to ensure it’s performing as expected.

Monitor fund performance and exit underperformers if needed, based on your Certified Financial Planner’s advice.

Keep an eye on changes in taxation rules and market regulations that could impact your returns.

Ensure your SIPs continue automatically. If cash flows change, adjust SIP amounts accordingly.

Finally: Staying Committed to Your Financial Journey
The journey to Rs 6 Crore or beyond is achievable with consistency.

Avoid impulsive decisions based on short-term market movements.

Keep your focus on the long-term horizon and stick to your investment plan.

Seek periodic advice from your Certified Financial Planner to stay on track.

The discipline and patience you’ve shown so far are commendable. Continue this momentum.

By following these strategies, your SIP investments can help you achieve significant financial milestones by 2030 and beyond.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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