I am an NRI and have accumulated ₹1.5 crore through SIPs over the last 10 years. I am 61 years old and plan to settle in India after I retire, one year from now. I hold ICICI Prudential Equity & Debt, Invesco India Contra Fund, Tata Multicap, ICICI Prudential Balanced Advantage and Mirae Asset Emerging Bluechip. If I were to use a Systematic Withdrawal Plan (SWP) from these funds to generate an income of ₹30,000 a month, do I need to change my mix of funds? Do I need to keep more in debt funds as the market is volatile? Should I do SWPs from one fund or many? I would also like my income to grow 6 per cent a year. What are the tax implications?

Kurian Mathew

If you are targeting a fixed monthly cash flow, it would be best to use SWPs mainly in mutual fund categories that generate their returns in a systematic and linear fashion. This makes debt funds better-suited to SWPs because they don’t see capital fluctuations and usually earn their returns in a regular fashion from interest receipts. With equity or hybrid funds, you run the risk of depleting your capital very sharply if you use SWPs in a bear market.

Therefore, you can switch a significant proportion of your accumulated corpus to debt mutual funds. Gilt funds, medium- to long-duration funds, dynamic bond funds and credit-risk funds generate their returns in fits and starts from bond-price movements and may prove too volatile for SWPs. We suggest PSU & banking debt funds, corporate bond funds, and conservatively managed low- or ultra-short duration funds for this purpose. Axis PSU & Banking Debt, HDFC Short Term Debt, Aditya Birla Floating Rate and ICICI Prudential Liquid fund are some good options to consider. Select 4-5 funds to adequately diversify your corpus.

An equity component becomes necessary if you want the growth in your accumulated corpus to keep pace with inflation in your post-retirement years

How much of your corpus should be in equity will depend on whether, based on moderate return assumptions, debt funds alone can meet your income needs throughout your retired life. In your case, if you can get by with a starting income of just ₹30,000 a month (rising 6 per cent a year thereafter), we find that you are likely to have sufficient corpus to fund your income until age 95. Using a 6 per cent annual inflation assumption, your expenses of ₹3.6 lakh at 60 will grow to ₹26 lakh by age 95. The present value of incomes you will need is about ₹1.18 crore — your current corpus exceeds this requirement. Therefore, there is no real need for you to have a compulsory equity component to your portfolio.

However, using SWPs involves several assumptions which can turn out wrong. To protect against the risk of running out of corpus in such eventualities, you can park, say, 20 per cent of your accumulated corpus, or about ₹30 lakh, in equity funds.

Index funds such as Axis Nifty 100 Index, UTI Nifty Index and Motilal Oswal Nifty 500 are good choices for the equity portion of your money. You should ideally not withdraw from these for the first 10 years of your retired life.

Planning for a retired life is not a one-off exercise and you will have to make several tweaks to this investment plan. So, do engage a qualified financial advisor to help you with your asset allocation and fund choices.

We aren’t qualified to advise on NRI taxation. But for Indian investors, setting up a cash flow through SWP is more tax-efficient than using the dividend option of a mutual fund or relying on bank fixed deposits or small savings schemes where the interest is taxable at your slab rate. This is because when you take the SWP route, your monthly withdrawals minus your cost of purchase of units is treated as capital gains and taxed accordingly. For SWPs of debt funds made within three years of your investment, the capital gain is taxed at your slab rate. For SWPs after three years, the gain is taxed at 15 per cent with an indexation benefit.

Send your queries to mf@thehindu.co.in

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