Skip to main content

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!!!


Comments

  1. AnonymousFebruary 24, 2025 at 12:12 PM

    Good read... Better way to handle SWP... Lower risk to corpus... 👍

    ReplyDelete

Post a Comment

Popular posts from this blog

Equity Investing – The Worst Case Scenario, 10 Year Horizon Basis

10 year CAGR for the period 1 April 2010 – 31 March 2020: 6.19%. Covid 19 made equity market tumble and we had to contend with a lowly equity market returns. We can safely say 10 years is long enough investment horizon. Investment return of this quantum will easily qualify as worst case scenario. And it was. If we consider only point to point figure. Here’s what unique to listed equity investing: it is NOT like buying property where you lock in “one” price at a point in time. Then why look at worst case (or even best or average case) on point to point basis? My opinion – to get an idea of real worst case scenario, looking at data on 3 year moving average basis makes better sense. Let’s see what numbers say. Point to point returns of 10 year period ending: -           31 March 2018:                          ...
Post a Comment
Read more

Debt Mutual Funds: Can They Still Provide Better Returns Than Bank Deposits or Direct Bond Holdings?

Now that you are done with quickly deploying money in debt mutual funds in last few days of FY 2022 - 2023 to take advantage of indexation benefits which stand withdrawn from 1 st April 2023 onwards, what would you do with any money coming your way which you do not want to put in growth (risk) investments like equities? If you go by news, the money would move back to bank deposits now that fixed income investment area has been tax-levelled. We’ll see in a while what numbers say. Though for me, bank deposits beyond the insurance amount are a strict no. That said buying GILTS from RBI Retail Direct portal does deserve a serious thought now. But first let’s look at some subjective benefits of keeping money in bond funds. I could think of two: -           Liquidity. Bond funds are very liquid, while I cannot say for sure whether direct government bonds will be that liquid as I have never sold a GSEC in secondary market. In fact, not bough...
Post a Comment
Read more

Asset Inventory & Investment Success

You don’t know how well your money is doing until you have a clear picture where all your money is. That is where the role of periodically working out asset inventory comes into play. While it may appear to be a chore initially (and it is), if one perseveres, the results may be the best guide a very successful financial situation. The best part – you don’t need any fancy apps or other tools to go about it. Simple excel sheet or even a diary if you prefer writing can do the job near perfectly. I am deliberately not putting up any sample asset inventory format. That is left to each individual. The format you go by can be a simple one, with just the asset type & associated number against it. Or an advanced one where you also plug in realistic expected return. Maybe even a super advanced one (if I can say that), where you adjust the weighted average portfolio returns with expected inflation to get an idea how well your investments are keeping up with purchasing power capacity. Wh...
Post a Comment
Read more