look news india
There is always a question in the mind of every employed and self-employed Indian that how will they get a fixed income every month after retirement. Traditionally people turn to bank fixed deposits (FD), Post Office Monthly Income Scheme (POMIS) or Senior Citizen Savings Scheme (SCSS). In an era of falling interest rates and rising inflation, the real returns from fixed deposits are failing to beat inflation. In such a situation, Systematic Withdrawal Plan i.e. SWP has emerged as a modern, flexible and tax-friendly option.
Systematic Withdrawal Plan is a feature of mutual funds that allows the investor to withdraw a fixed amount from his deposits at a fixed interval. This amount gets credited directly into your bank account on monthly, quarterly or yearly basis. The biggest feature is that only as many units are sold as the amount you withdraw, while the remaining units remain invested in the market and take advantage of compounding.
If an investor has a lump sum corpus of ₹1 crore built up from retirement, property sale or EPF-gratuity, he can plan to withdraw ₹1 lakh every month i.e. ₹12 lakh annually. Normally withdrawal of ₹12 lakh annually on ₹1 crore makes a withdrawal rate of 12%. Withdrawals of 12% in the traditional banking system mean that the original capital will be exhausted within a few years, but in mutual funds with the right asset allocation the picture may be different.
If your ₹1 crore fund is invested in a hybrid or diversified equity oriented fund and it is able to deliver an average return of 12% to 13% per annum, the portfolio returns will keep compensating your withdrawals. For example, a fund of ₹1 crore with an expected annual return of 12% will generate a wealth of about ₹12 lakh every year, which you will withdraw as a pension of ₹1 lakh per month. Due to this, even after withdrawing ₹ 1 lakh every month for 10 years (total ₹ 1.20 crore), your original corpus of ₹ 1 crore can remain safe or more.
The entire interest received in bank FD is taxable as per the income tax slab of the investor, that is, the net return of an investor in 30% slab becomes extremely low. In contrast, each withdrawal under SWP includes a proportionate share of both principal and capital gain. Tax is applicable only on the profit portion and not on the entire withdrawal.
Long Term Capital Gains (LTCG) is applicable on holdings more than 12 months in equity oriented mutual funds. In this, capital gains up to ₹ 1.25 lakh during a financial year are completely tax-free and profits above that are taxed at only a concessional rate of 12.5%. This is why SWP significantly increases in-hand returns compared to bank FD for investors falling in higher tax brackets.
Fluctuations in the stock market are a natural process. The flat withdrawal rate of 12% works ideally only when the market has consistently positive returns. If the market falls drastically in the first 2-3 years of investment, it is called ‘sequence of returns risk’. Making large withdrawals during a recession can cause units to depreciate rapidly, impacting the recovery potential of the portfolio.
Financial planners always recommend adopting a conservative or balanced withdrawal rate rather than having an overly aggressive withdrawal rate. Withdrawals of ₹65,000 to ₹75,000 (about 8% to 9%) per month on a corpus of ₹1 crore are considered risk-free from a long-term perspective. Not only does this provide a respectable pension every month, but over time the original corpus of ₹1 crore can grow to ₹1.5 crore or even ₹2 crore, which helps fight future inflation.
To create a safe SWP plan of ₹1 crore, one should never invest the entire money in smallcap or highly volatile sectoral funds. The wise move is to opt for Balanced Advantage Fund (BAF), Multi-Asset Allocation Fund or large-cap oriented hybrid funds. These funds automatically rebalance between equity, debt and gold as per market valuations, thereby limiting downside risk.
A practical strategy is for investors to first keep an amount equal to 1 to 2 years’ expenses (approximately ₹15-20 lakh) in liquid or ultra short term debt funds and invest the remaining ₹80-85 lakh in hybrid funds. Book profits from hybrid funds when markets are bullish and withdraw from debt buffer during downturns. Through this disciplined strategy, Indian investors can enjoy their golden retirement life without any financial stress.