Sir,I am Sreejith..I am looking to do an SWP for my father, who is 70 years old now, targeting a monthly withdrawal of Rs.10,000/-. The lumpsum amount intending to invest is Rs.8-9 lakhs. Is this possible with this amount to withdraw an amount of of Rs.10,000/-.per month? Which type of mutual funds are good for doing SWP ? Is it wise to do SWP in equity oriented funds like large cap, Mid cap,Flexi cap etc. Also is it good to do SWP in two mutual funds with the above Rs.8-9 lakhs. ?Sir, Iam expecting your valuable reply.
Ans: Systematic Withdrawal Plan (SWP) is an excellent way to ensure regular income during retirement. Given that your father is 70 years old, it's important to balance growth and safety. Let’s assess your situation to provide a 360-degree solution.
Assessing the Lumpsum Amount
Investment Corpus: You intend to invest Rs. 8-9 lakhs. This amount is crucial in determining the monthly withdrawal amount of Rs. 10,000.
Sustainability of SWP: With Rs. 8-9 lakhs, withdrawing Rs. 10,000 monthly could be challenging over a long period. Let's explore how this can be managed.
Understanding SWP in Different Mutual Funds
Equity-Oriented Funds: These funds, such as large-cap, mid-cap, and flexi-cap, generally provide higher returns. However, they are also volatile. While equity can provide inflation-beating returns, it might not be the best sole option for a 70-year-old.
Hybrid Funds: A balanced or hybrid fund combines equity and debt. This mix can provide growth with lower volatility. It’s safer for an SWP at your father’s age.
Debt Funds: These funds are safer and less volatile. They might not offer high returns but can provide stable income. They are often used for SWP by retirees to preserve capital.
Which Type of Mutual Funds Are Good for SWP?
Balanced Approach: Combining equity and debt funds can create a balanced portfolio. This approach offers both growth and safety.
Two-Fund Strategy: Splitting the Rs. 8-9 lakhs into two different funds can diversify risk. One fund could be a hybrid fund, and the other a debt fund. This combination can provide stability and growth.
Safety First: Considering your father's age, prioritise safety. The bulk of the investment should be in debt or hybrid funds. A smaller portion can be in equity to capture growth potential.
Is SWP in Equity-Oriented Funds Wise?
Risk Consideration: Pure equity funds can be risky for someone in retirement. Market fluctuations can affect the fund value, impacting the sustainability of the SWP.
Diversification: If opting for equity-oriented funds, ensure they are part of a diversified portfolio. Avoid putting the entire amount in high-risk funds.
Long-Term Growth: While equity can provide good returns, it’s crucial to balance it with safer options, especially when relying on the funds for regular income.
Practical Insights on SWP Execution
Withdrawal Sustainability: If you withdraw Rs. 10,000 monthly from Rs. 8-9 lakhs, the sustainability depends on the fund’s performance. In a conservative estimate, this might last for 8-10 years in a balanced portfolio.
Reinvestment of Gains: If the funds perform well, you can reinvest the gains to extend the SWP period. This requires regular monitoring.
Consulting a CFP: To ensure the strategy aligns with your father’s needs, consult a Certified Financial Planner. They can tailor the fund selection to match his risk profile and income requirements.
Final Insights
Balanced Portfolio: Prioritise a mix of equity and debt, leaning more towards safety due to your father's age.
Two-Fund Strategy: Split the investment into two different funds to diversify risk and ensure stable withdrawals.
Monitoring: Regularly review the performance of the funds. Adjust the SWP if required to maintain sustainability.
Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner,
www.holisticinvestment.in
