I am aged 49 years and retired. I wanted to invest ₹50 lakh in mutual funds to start SWPs. I have the following questions:

1 Should I do a lumpsum investment of ₹25 lakh right away? If yes, which funds should I invest in and how much in each of them ?

 2 Can I invest the remaining ₹25 lakh through SIP? If so, which funds and how much?     

3 Else, can I do a lumpsum of ₹50 lakh now and start SWPs a with 5 per cent withdrawal rate now ? If not, after two or three years, I can do SWPs with a with 7-10 per cent withdrawal rate.

Kindly advise.

Sajja

Three things need to be factored in, when considering SWPs – one, choice of funds, two, withdrawal rate and three, taxation.

As far as the choice of funds go, since you have retired, funds which give stable /steady returns with less volatility and without taking high risks are to be preferred. Debt funds will suit your purpose.

While fund houses allow withdrawal of a fixed sum every month, many allow the withdrawal of capital appreciation alone, as well. If you are looking for a regular income from the SWP to supplement your monthly spends after retirement, then fixed sum withdrawal may suit you. Here, you need to choose the withdrawal rate carefully such that you can stay invested for longer; the fund also, on average, can earn slightly higher than the withdrawal rate. This way, the investment would not be depleted too soon. A 5-6 per cent withdrawal rate could be a good number to work with for debt funds.

On the taxation front, your withdrawals from debt funds will be taxed in your income tax slab rates, whether you start withdrawing immediately or after one/two/three years.

Coming to the choice of funds, those following accrual strategies as well as investing in lower risk instruments can constitute about 60 per cent of your investment. Corporate bond fund and banking and PSU debt funds are among the key categories that fall in this grouping. Over the last five and 10 years, average annual returns of funds in these two categories are in the 6.5 -7.5 per cent range for lumpsum investments. In the banking and PSU debt fund category, you can choose from the stables of Bandhan and Nippon. Go for the Aditya Birla Sun Life (ABSL) and/or ICICI funds in the corporate bond funds category. All these funds are rated 5/4 star by bl.portfolio Star Track MF Ratings. The average maturity of their current portfolios range from two-four years. Interest rate risk will be lower in lower durations. These funds hold only AAA, A1+ and Sovereign instruments as per their latest portfolio, thus bringing down the credit risk. Based on calculators available online, a ₹30-lakh corpus — with a withdrawal of ₹15,000 a month (6 per cent withdrawal rate), assuming a 7 per cent return and 5 per cent inflation — will last for about 20 years.

The remaining ₹20 lakh of the corpus can go into categories such as liquid, ultra-short, low-duration funds and money market funds which invest in instruments with maturity of 91 days (liquid funds) up to one year (money market funds). The very short duration of these funds brings down the interest rate risk. Over the last five- and 10-year periods, lumpsum investments in these categories have returned 5-6.5 per cent annually, on average. However, you must ensure that you choose funds which take very low credit risk in their portfolio. HDFC Money Market, ABSL Money Manager and SBI Magnum Ultra Short Duration make the cut. These funds are also rated 5/4 star by bl.portfolio Star Track MF Ratings.

Give about a year’s time for the gains to accumulate before you begin your SWPs, if possible. When you begin immediately after investing, you will be withdrawing from your principal.

Keep in mind that in SWPs your corpus could be depleted entirely after a point in time. Since you are only 49 now, you need to factor this in even more and have other sources of income beyond the SWP. One way is to diversify with fixed deposits. Interest rates on deposits are near highs now and at bl.portfolio, we have been recommending various bank and AAA-rated NBFC deposits in recent times. RBI floating rate savings bonds can also be considered.

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