For optimal after-tax returns that are stable and consistent, a systematic withdrawal plan in a high quality accrual debt mutual fund will be suitable.
SWP strategy involves investing a lump sum in a fund with an instruction to the fund to transfer a certain amount of the investment every month or quarter.
I want to invest Rs 10 lakh for the long term so that it can earn a regular monthly/quarterly income for my parents. Please advise.
Rahul Parikh CEO, Bajaj Capital replies: Since you are making this investment to generate regular income for your parents, your risk appetite is likely to be conservative.
For optimal after-tax returns that are stable and consistent, a systematic withdrawal plan in a high quality accrual debt mutual fund will be suitable for you. SWP strategy involves investing a lump sum in a fund with an instruction to the fund to transfer a certain amount of the investment every month / quarter to the investor's bank account.
This strategy carries lower tax incidence after three years of investment as the gains are treated as long-term capital gains—taxed at 20% if you avail indexation benefit and 10% if you don't. Some accrual debt schemes you may consider are ICICI Pru Credit Risk, UTI Credit Risk and SBI Credit Risk. You may invest in these funds in equal proportion and start SWPs at 7% per annum—Rs 5,800 per month. This strategy is likely to deliver regular cash flows to your parents and keep the principal investment intact—it may even grow.
I am 74 years old and, until recently, had been investing in bank FDs. But due to rising inflation and reduced interest rates, I invested Rs 12 lakh in equity mutual funds six months ago. The results have not been good. I am thinking of redeeming at least Rs 7-8 lakh of the investment, putting it in debt funds, and starting systematic withdrawal plans (SWPs). Please advise.
Prableen Bajpai Founder, Managing Partner, FinFix Research & Analytics replies: Equity mutual funds tend to beat inflation and earn a higher return compared to fixed income products, but equity investments must be considered only if you have an investment horizon of at least 4-5 years. Six months is too short a time period to evaluate your equity investments.
Going by the rule of thumb for asset allocation—100 minus your age— around 26% of your portfolio can be allocated to equity. However, the exact allocation to equity will depend on your net worth, retirement corpus and sources of income. Given the current scenario, if you need the money invested in equity mutual funds for meeting household expenses, you have no choice but to cut your equity exposure and move to debt funds or opt for an SWP. Overall, an SWP is a good way to meet regular income needs.
However, if you can spare this sum for a longer time, it is advisable that you stay invested and gradually move to debt funds depending on your requirement and age.