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Ramalingam Kalirajan |7290 Answers |Ask -Follow
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
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
Question by Ashish on Nov 09, 2024Hindi
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 For example the corpus is 10000000, monthly amount required to be withdrawn through SWP is 80000, period of investment of the said corpus is 15 years, amount required after 15 years in 30000000.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
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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