Home >Mutual Funds >News >Systematic withdrawal plan is the most tax-efficient way to get regular income

My father is retired now and he has one small parcel of land, a flat that has been rented out and a corpus of 80 lakh. What is the best way to invest this money so he can have a regular income? He is living in his own house currently and the monthly expenses are about 30,000.

—Nitin Iyer

The financial assets i.e. balances in banks need to be invested for growth in capital as well as to give your father a regular income. For investments, it is good to know your father’s risk profile as a certain amount can then also be invested in the equity asset class via mutual funds. Subject to his risk profile, the exposure in the equity asset class can be up to 30% of the total investible surplus. The other investments can be made in the debt asset class, mainly bank fixed deposits (FDs); mutual funds (MFs), wherein short-term funds can be a good option. The marginal rate of tax will be the deciding factor for opting for FDs or MFs. In MFs, you can go for a systematic withdrawal plan (SWP) to structure your monthly income. The SWP facility can be used by an investor to withdraw a pre-determined amount from his investments in funds at pre-decided intervals. It is one of the most effective and tax-efficient ways to create a regular income. Subject to rental income from the flat, you can determine how much more is required on a monthly basis which can then be provided from the invested corpus amount via SWPs from mutual funds or monthly income from bank deposits. However, you need to ensure that your withdrawals are less than your income earned as you need to increase the capital base to protect your corpus from inflation. Further, you also need to decide about the land parcel. If there is a growth potential, then you can consider holding, otherwise you may consider redeployment of the same as your exposure to real estate is already on the higher side.

I am 21 years old and have just started earning. I can save 35,000 every month. I plan to do my MBA when I am 25 or 26 years old. Where should I invest? I am hoping to accumulate 20-25 lakh. Will I be able to meet my target?

—Latika Rathi

It is good that you are planning to invest the surplus funds early in your job career, and mapping investments with a goal is a step in the right direction. Investments of 35, 000 per month for the next five years (not counting any increase in savings as salary increases) will result in a principal saving of 21 lakh. Assuming a growth rate of 10%, the corpus will become 27.3 lakh. As your salary goes up each year and if you receive any bonus, you can add that to your savings, based on your cash flows. The investments can be made via systematic investment plans (SIPs) and you can diversify your portfolio by having asset allocation across various categories of debt and equity investments. Debt will provide stability and reduce the volatility in the portfolio; you can consider a short-term debt fund. Equity will generate higher returns to ensure a combined portfolio return which is inflation-adjusted. The equity portfolio can be spread across large- and multi-cap funds.

Surya Bhatia is managing partner of Asset Managers.

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