Phased out or lump sum withdrawals—what should you opt for?

One of the key objectives of investing is to meet your financial goals. And if you have already achieved them, what should be your course of action?

The standard response would be to redeem your investments and withdraw the money so that you can use the same towards your goals. However, this is not an advisable thing to do, at least in most cases. Let us understand why.

The following are the key factors which determine whether you redeem your investment in one go, or opt for SWP or Systematic Withdrawal Plan:

A. Category of goals: There are two kinds of financial goals for which investors tend to save: for retirement and definite (short-term or medium-term) goals such as paying a child’s college fee or buying a car.

If the goal is definite, for instance, you have been saving to accumulate ₹10 lakh for a specific purpose, then the decision to redeem in a lump sum can be justified.

B. Timing of market: When the market is undergoing a bearish phase, one tends to be fearful of redeeming the investment in one go, thus getting drawn towards an SWP. On the other hand, when the market is bullish, investor tends to be incentivised to redeem in one shot.

I. Category of goals

Definite goals:

If there is a goal other than retirement, you know exactly how much money you require.

“As far as definite goals are concerned, it makes sense to opt for the SWPs in 3-4 chunks, say 25 per cent every three months, thus withdrawing the entire money over a one-year period,” says Amol Joshi, founder of Plan Rupee Financial Services.

Saving for retirement

When you have accumulated enough money for retirement, then it does not make sense to redeem it in a lump sum. Wealth advisors recommend that retirees should redeem via SWPs because it serves two purposes: A) You are not going to use the money in one go, so you should withdraw at the pace you are spending. B) By deferring the withdrawal, you get to maximise your return on investment.     

“We recommend SWP primarily in hybrid funds, balanced advantage funds or equity savings funds. It is suggested to withdraw 8 per cent on an annual basis (quarterly withdrawals) in order to ensure annual income,” says Sridharan S, founder of Wealth Ladder Direct.

“The retirement will last for anywhere between 5 to 20 years or even longer. Then what is the point of redeeming everything and putting everything in the savings account which will give you only 2-3 per cent,” Joshi adds.

II. Market timing

If the market is volatile, it is typically not recommended to redeem investments of large proportions. However, when it comes to long-term investments, the timing of the market at the time of meeting the financial goals is rendered insignificant.

To investors who are worried about the timing of the market at the time of redemption, Joshi says, “The corpus must have already been invested over a number of years before the retirement, so the exact timing of themarket at the time of redemption does not matter much.”

"If the withdrawal is needed for liquidity reasons or due to changes in the fund's thesis or fund manager, a lump sum withdrawal is generally more appropriate. On the other hand, if the goal is to generate regular cash flow or to use the money over a period of time, a SWP is a better option," says Alekh Yadav, Head of Investment Products, Sanctum Wealth.