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De-accumulation From Equity Funds: SWP Or Is Their A Better Way?

Most popular, or shall I say most sold way of redeeming from equity funds in deaccumulation phase (retirement?) is the monthly “Systematic Withdrawal Plan (SWP)” way, like monthly SIP is for investing and building the corpus.

Key benefit of monthly SWP: It’s like getting a pension on a particular day. There is sort of continuity in getting regular income in the bank. Plus there is a forced limit on your spending as you get to spend only that amount which you get in your bank savings a/c from the SWP.

Key cons of monthly SWP: In the short horizon of few months or even a year, equity market’s can yo – yo. Sometimes, A LOT. Here we saw that there is 22% chance of losing a large part of your capital with investing horizon of an year. In fact, here we have seen that there have been instances of equity markets delivering losses even on a 5 year horizon basis.

If I had to work out withdrawal strategy for myself which will be funding my regular expenses sans a salary, I would follow a low, rather no risk way suggested by author Charles Ellis in his book “Winning The Loser’s Game”. This is what he said:

“Put a rolling five years’ expenditures in medium term bonds and the rest in equities the year you retire. Each year, convert one more year’s spending from equities to bonds unless the market is high and all the chatter is about good prospects – in which case, you’ll be wise to convert two years: if the chatter is about great prospects, covert three. Yes, this is a form of market timing, but it’s seldom a bad idea to lean against the wind”

Effectively, what the author is saying that one should have 5 to 7 years of expenses locked in safe fixed rate instruments. While worst case scenarios don’t occur often, they do happen once in a while and having at least 5 year’s of your expenses socked out of harm’s (market gyrations) way is desirable to ensure you don’t get into panic mode.

Here are some numbers to consider: let’s say you have accumulated INR 1 Crore in equity mutual fund investments. Your current monthly expenses are INR 25,000/- or INR 3 Lacs per annum. A 10% crack in the market will wipe off 3 years of expenses in the portfolio. Do you really want to take that chance?

I would rather not. Here’s how I will go about it:

-          6 months expenses in bank savings a/c

-         Of balance 4.5 years of corpus, 75% in overnight mutual funds and 25% in 10 year constant maturity GILT funds.

-          Put quarterly SWP’s from overnight funds to make regular income generation a smooth and risk less affair

-          Review once a year and replenish the shortfall in any of the bucket  

A side benefit of having 5 years of expenses in fixed rate investments: serves as an emergency fund too!!!


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