I am 58 years old and I work with a private firm in Bangalore. I have invested in equities and equity mutual funds earlier. But now my wife wants us to save a part of our savings with fixed-income and non-risk funds for our retirement. My wife is a housewife and our daughter is in her MSc final year.
Name withheld
Reply by Jiral Mehta, Senior Research Analyst, FundsIndia
A proper investment plan can help you build your corpus which can be used for your goals including retirement. In your retirement when you don’t have a regular source of income, systematic withdrawal plans on the corpus built can help you with a stable source of monthly income. And, if this is properly planned then your monthly amount can also be increased every year to keep up with inflation along with letting your original corpus grow.
It is important to get the asset allocation right for the retirement portfolio. You will need to have an asset allocation with a combination of an asset class that provides good returns over the long term but has short-term volatility/instability with an asset class that provides average returns over the long term but has stability over the short term.
We prefer an allocation of equity and debt, where the systematic withdrawal plans (SWP) can be set in such a way that during normal market conditions the withdrawal happens from the equity allocation. If there is any large temporary market fall then you stop the SWP from equity allocation and start the SWP from the debt allocation. Once market conditions are back to normal then you resume the original withdrawal from equity. Also, ensure you rebalance your portfolio annually for any deviations in the asset allocation beyond +/-5% range.
Systematic Withdrawal Plan (SWP) is a service provided by mutual fund companies, allowing investors to withdraw a fixed amount of money at regular intervals, typically on a monthly basis. SWP is commonly used by retirees, senior citizens, or individuals seeking a consistent income stream to effectively manage their cash flows. Once an investor sets up a SWP specifying the withdrawal amount and frequency, a predetermined number of units from the mutual fund scheme are redeemed on the scheduled date, and the resulting proceeds are transferred to the investor’s bank account. The remaining units in the scheme continue to fluctuate in accordance with market movements.
Compared to relying on dividends from mutual fund investments, SWP is viewed as a more dependable option for maintaining monthly cash flows. In an equity fund’s dividend plan, the amount, frequency, and timing of dividends are not guaranteed and are subject to market conditions and the fund’s profitability for distribution. By utilizing SWP, investors can achieve more stability and predictability in their regular income as the scheduled withdrawals are consistent and independent of market fluctuations.
Systematic Withdrawal Plan (SWP) functions as a strategic tool designed to provide a consistent income stream for covering expenses. Under an SWP framework, investors have the flexibility to withdraw a fixed amount regularly, typically on a monthly or quarterly basis, by redeeming a specific number of units.
Unlike other investment schemes, the withdrawn amount through an SWP remains stable regardless of market fluctuations, ensuring a predictable payout until the invested capital is depleted. This feature distinguishes SWP as a more reliable option when compared to traditional dividend plans offered by mutual funds, now referred to as Income Distribution-cum-Capital Withdrawal plans.
Retirees, senior citizens, or anyone who wants a regular income stream is using this route to manage cash flows. Once a SWP is set up for an amount and a date of your choice, units from your scheme for the corresponding amount get redeemed on that day, and the proceeds are credited to your bank account. The remaining units in the scheme keep moving in line with the markets.
SWP works better than a dividend. In the dividend plan of an equity fund, there is no guarantee on the quantum, frequency and date of the dividend. It depends on market movements and the profits available in the scheme for distribution. SWP works better than relying on mutual fund dividends for regular income as it brings stability.
(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)
