Can SIPs help in diversifying portfolio?

—Kumaran R.

It is always better to invest based on your financial goals. You have total SIP investments, including future allocations, of ₹16,000. Of this, you have a 25%, or ₹4,000, allocation to gold. Usually around 10% allocation is gold is good enough for long-term investing.

Axis Bluechip Fund has underperformed for some time and you can reconsider investing that amount in another fund. Mirae Large Cap Fund has been a good fund for a long time though it has underperformed its peers in the recent past. It continues to remain a good option in the large-cap Fund category. You can also opt to add SIPs in some of the following funds. SBI Large and Mid Cap Fund, ICICI Bluechip Fund, HDFC Flexicap Fund, 360 One Focussed Equity Fund and Kotak Emerging Equity Fund.

NPS is a decent investment avenue to build a corpus for retirement as it allows you to invest 75% in index funds, but the money gets locked up till the age of 60. Also, at retirement, you have to invest 40% of the accumulated amount in annuities. These factors impact liquidity and returns in the case of NPS. If you have a long time to go for your retirement, then equity mutual fund is a better option.

What is the suitability of making a lump sum investment of ₹50 lakh in both HDFC Balanced Advantage and ICICI Prudential Equity & Debt Fund? I want to know whether it is a prudent decision to initiate a Systematic Withdrawal Plan (SWP) after one year, withdrawing 5% from these funds as a regular source of income.

—Name withheld on request

The plan of withdrawing 5% at the end of every year from the invested amount is doable.

However, there could be a scenario when these funds may generate returns lower than 5% in a particular calendar or a rolling year. However, over a longer period, the average return from these funds is expected to be higher than your planned withdrawal.

The second and most important thing is to consider inflation while planning for such withdrawals. If we assume an average return of 9% p.a. from your investment and you withdraw 5% at the end of every year. The annual withdrawal in the first year will be ₹5.45 lakh or ₹45,400 per month. And this annual withdrawal amount keeps increasing every year as the corpus grows. But, when we take into account inflation of 6%, the value of the monthly withdrawal drops after 5 years to close to ₹39,000 and after 10 years to ₹35,000. Hence, you should consider inflation and also think of increasing the withdrawal percentage every year to keep your purchasing power intact.

Both HDFC Balanced Advantage and ICICI Prudential Equity & Debt Fund are good funds in the Hybrid Funds category and you can consider investing in these funds.

Harshad Chetanwala is co-founder at MyWealthGrowth.com

Updated: 01 Aug 2023, 09:58 PM IST