I have Rs 20 lakh to invest, received as my retirement benefit. I wish to invest this amount for regular income by way of SWP after a year of investment. Please advise which of a conservative hybrid or dividend yield fund is advisable for this purpose. I am 74 years old and expect the fund to last for another 15 years. The SWP amount in my mind is Rs 12,000 per month.
As you are aiming to draw income from the corpus that has been accumulated over time, the primary objective during retirement should not be wealth creation but to generate stable income from the portfolio adjusted for inflation.
To achieve your desired objective of monthly income of Rs 12,000 per month, you could consider investing the entire Rs 20 lakh in money markets funds which generates and annualized returns of 5.5%. This will easily fetch you the desired monthly income for 15 years even if we consider 6% inflation rate.
We would not advice you to invest your entire corpus into conservative hybrid or dividend yield fund as they come with some risk. Many investors believe that dividend yield funds pay good dividends. However, that isn’t necessarily the case. Dividend yield funds primarily invest in equity shares of companies with strong financials that declare regular dividends. While the companies only distribute dividends to shareholders when they are profitable. Also, these funds can invest 35% of its net assets in any stocks and can also have a value tilt. That said, even the best dividend yield mutual funds are associated with moderate to high levels of risk as their performance is dependent on market conditions.
Likewise, conservative hybrid funds are not risk-free. These primarily invest in debt securities (around 85%) with a small portion allocated to equities. However, the returns of these funds are predictable as they majorly invest in fixed income securities.
If you are willing to take some risk, you could consider investing with a portfolio mix of about 10% into equities and 90% into fixed-income funds. A small allocation to equities will give a boost to your overall returns. The equity portfolio could be allocated between Index funds or equity allocation from Conservative hybrid fund. While the fixed income exposure could be spread across Arbitrage and Money market funds (35%), and shorter duration funds (50-55%). The money market funds would provide the initial withdrawal corpus as such funds entail low volatility given their investments into low-risk instruments and pay dividends that generally reflect short-term interest rates. By using the portfolio mix approach, your expected yield could be slightly higher by about 7.5-8.5% and would create some wealth over the long run through equity investments.
You could also look to invest the debt portion into pension annuities, post office savings schemes such as the Senior Citizen Savings Scheme (SCSS), Monthly Income Scheme (MIS) and the Pradhan Mantri Vaya Vandana Yojna, which may offer slightly higher interest rate and are subject to caps on the maximum amount that can be invested.
Most important, before estimating your regular income requirement, you should consider for significant costs like medical contingencies since otherwise, these costs could deplete your retirement resources.
Taxation
Interest earned from the small savings schemes and from fixed deposits are all taxable at the marginal rate in your hands. Compared to these options, debt mutual funds would serve you better from a post-tax perspective. For holding periods of more than three years, debt mutual funds are taxed at 20% after indexation of costs. This significantly lowers your tax outgo.
Dividends from mutual funds are taxed in the hands of the investors, at the marginal rate of tax, as applicable. Hence, for investors facing a marginal tax of 20% and above, it is advisable to invest in growth plans and then withdraw periodically via the SWP route.
Take help
We would also recommend consulting with an Investment Advisor who can assist you in drawing up an appropriate asset allocation for your portfolio. Regular monitoring of your investment portfolio is necessary to ensure alignment of your investments with your financial goal.
Additional Reading
Where to invest for a regular income
Investing the retirement corpus
Investing in debt funds
Ask Morningstar archives
Articles authored by Nehal Meshram
Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.
