I have built a good corpus through a mix of equity and hybrid funds. I am nearing retirement and would be seeking regular cash flows through my investments. Which funds are suitable for a systematic withdrawal plan (SWP)?
—Name withheld on request
To meet regular cash flow requirements, a SWP can be quite useful. But the funds that are suitable for this depends on the individual’s risk appetite and liquidity needs. Usually, it is better to go with low-risk funds to ensure capital protection.
One can either go for a plain vanilla debt fund such as ultra-short-term funds, which are less sensitive to interest rate movements, compared to longer duration funds. The other option is conservative hybrid funds.
Balanced advantage funds (BAFs) can be avoided as these can be a lot more aggressive in terms of their equity investments; can go up to 90% equity exposure during market correction.
A conservative hybrid fund (allocation mix: 10-25% equity, 75-90% debt) can be considered as one of the withdrawal buckets for SWP. This can be complemented with ultra short-term fund for immediate expenses (up to two years) and the rest of the corpus can be parked in a conservative hybrid fund.
Every two years, the funds can be rotated from conservative hybrid to ultra short-term, which will allow more time for corpus in conservative hybrid to appreciate and also keep immediate expenses in low-risk fund. This is also known as bucket strategy.
I have a systematic investment plan (SIP) across a wide range of mutual fund categories —a couple of bluechip funds, a hybrid fund, three large cap funds, etc. I also want to invest in gold. Is this good to build a well-diversified investment portfolio ?
—Name withheld on request
You can continue your SIPs. But for large-cap funds, it is better to go with passively-managed funds. So, you can consider index funds for further investments in the large- cap category. It is increasingly becoming difficult for large-cap schemes to beat the Nifty 50 Index benchmark. Therefore, you may consider a Nifty Index Fund. For potential outperformance, you can consider investing in active funds in the mid-cap and small-cap space.
If you have surplus funds after meeting household expenses, you may consider stepping up your SIPs. Additionally, investing in debt products like corporate bonds and debt mutual funds can help reduce the overall risk of your portfolio.
We also advise maintaining an emergency corpus equivalent to six months of your salary. This fund can be kept in liquid or ultra short mutual funds. Also, take medical and life insurance to provide financial protection to your family.
Consider investing in sovereign gold bond (SGB) scheme, which offer a 2.5% p.a. coupon in addition to potential appreciation in the value of gold. Moreover, there are no capital gains on maturity, making them a highly tax-efficient mode of investing. But, remember SGBs come with a lock-in period.
Periodic portfolio reviews and working with a financial advisor can ensure the investment plan remains aligned with your objectives.
Vijay Kuppa is the chief executive officer of InCred Money (formerly Orowealth).
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Updated: 03 Aug 2023, 10:11 PM IST