I am a senior citizen. I have Rs 20 lakhs. Capital protection is primary. But I would like some income from this by way of SWP after 2 years on a quarterly basis.
Longer life spans and falling interest rates have made the issue of retirement planning even more trickier.
The RBI has cut the policy rate sharply since 2019 and has announced a slew of measures to mitigate the consumption-led slowdown in the economy, which has recently got further aggravated owing to the COVID-19 pandemic. The measures announced along with abundant liquidity in the banking system have resulted in yields falling substantially, particularly at the shorter end of the yield curve. Consequently, the yield-to-maturity on fixed-income mutual funds too have come off, particularly in case of the shorter duration categories. Banks too have cut down on deposit rates to pass on the reduction in interest rates in order to protect their profit margins.
If you needed the entire amount in a short horizon, we would recommend a portfolio entirely of fixed-income funds. But combining the need for capital protection and liquidity requirement starting in 24 months, we will go with a conservative risk profile.
The portfolio
You can construct a portfolio with an allocation to equity (10%) and debt (90%).
The equity exposure, though fully into large caps, would lend an element of growth to the portfolio.
The fixed-income corpus would be in accrual debt mutual funds with a high credit quality portfolio (funds such as Short Duration, Banking & PSU Debt, Corporate Bond, Medium-term Debt).
The withdrawal
Assuming a withdrawal span of 20 years and investing as per the recommended allocation, you would be able to access Rs 33,500 per quarter (pre-tax). The corpus amount has been computed assuming equity market returns of 9.5% per annum and fixed income returns of 5.5% per annum.
The tax
Assuming no other taxable income, if capital gains from the withdrawals are lower than the basic exemption limit of Rs 3 lakh (applicable to senior citizens), entire gains would be tax-free.
In case of taxable investors, the short-term gains (holding period up to 3 years) are taxed at marginal rate, while long-term gains are taxed at 20% (excluding cess and surcharge if applicable) post indexation of cost in case of fixed-income funds. For equity funds, short-term gains (holding period up to 1 year) are taxed at 15%, while long-term gains in excess of Rs 1 lakh per annum are taxed at 10%.
To save on tax, park about Rs 9 lakh into fixed deposits, as interest income from them is tax deductible up to Rs 50,000 per annum under section 80TTB for senior citizens.
One should note that actively managed mutual funds have the potential to generate higher returns than the interest rates offered by bank deposits. But one must also be cognizant of the inherent risks in debt mutual funds such as interest rate risk, credit risk and liquidity risk which can subject the portfolio to significant drawdowns as witnessed in recent times.
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While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.
