Portfolio withdrawals during retirement

By Mohasin Athanikar |  22-11-20 | 
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About the Author
Mohasin Athanikar is an Investment Analyst for Morningstar Investment Adviser India.

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.

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.

While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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ninan joseph
Nov 25 2020 08:02 PM
You are a senior citizen and you say capital protection is critical.
There is only one option
Place the amount in Post office or Senior Citizen Scheme which gives a higher return. The average return would be 7.5%. I am sure you can submit 15G and get waiver for TDS. If you are reaching the exemption limit, put the deposit in your and wife name.

From the quarterly interest, if you have any surplus, please put a portion into equity. This is the only fool proof solution.
Remember, mutual fund do not guarantee capital protection including debt funds. You know what happened to FT. On top of it MF takes commission of upto 2%. Not worth taking the risk. Just put the corpus in FD or post office and when you get your quarterly interest, put a small portion in equity by way of ETF. Do not go for Mutual fund

When market is at the peak, debt funds, equity funds, etc will pop up out of nowhere. You will be intimidated by the stock market increase and think you will miss the bus and start investing. This is the classic mistake retail investors do. If you were employed, it was ok. If you have alternate income it is fine, You are a senior citizen and do not want to risk your capital. Do not go near debt funds. Equity is much better than these debt funds. No one knows what these guys are upto. Look at all the examples over the last six months.
The other option is RBI floating savings bonds or even gilt funds. Nothing else will i recommend for you.
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