How lumpsum investors should plan their investments?


When you are investing a lumpsum amount in mutual funds, the objectives are two – Let the lumpsum investment grow till such time your investment objectives are met. However this may be applicable for young and mid aged investors who are still earning and have long to medium term horizons for their investments.

However, there is another type of investors, generally retired or aged investors, who have lumpsum amounts in hand and want to invest in mutual funds but their objective is to get a regular income from their investments.

We will discuss how these two type of investors can invest in mutual funds.

The first set of investors should map their one-time mutual fund investments to mid or long term goals and stay invested till goals are met. But how would they know if the planned lumpsum investment would be able to meet their goals. This is where, one can take help of a lumpsum calculator. Once you input the lumpsum investment amount, the investment tenure and the expected returns in the lumpsum calculator, it will show you the future value of your current investments.

For example – if you input Rs 500,000 as the lumpsum amount, 20 years as tenure and expected return as 12%, immediately the lumpsum calculator will show the future value as Rs 48,23,147. Therefore, very easily you can plan your investments in mutual fundschemes with help of this tool.

Now let us discuss the second type of investors. These investors should invest the lumpsum amount in mutual fund schemes and opt for SWP plan. Also known as Mutual Fund Systematic Withdrawal Plan, it is a smart investment solution whereby investors can invest in lumpsum and draw a fixed amount every month or in any other frequency. The AMC generates the cash flow by redeeming the units of your mutual fund investmentat the applicable mutual fund NAV on the date of withdrawal.

But how to plan the SWP withdrawals and understand how much you can draw and how long the corpus will sustain? You can take help of a SWP calculator and input the one-time investment amount, expected returns on the investment,the monthly SWP withdrawal amount and the investment tenure.

Once you input these in the SWP calculator it will show you the monthly cash flows and also tell you how much amount will be left after the SWP period/ or of the SWP can continue till the period selected.

The important aspect of a mutual fund SWP is the withdrawal rate. If the withdrawal rate is less than the long term average returns of the mutual fund schemes you have invested in, not only you will be able to sustain the regular cash-flow but can also get capital appreciation in the long term.

Benefits of SWP

  • Like SWP, regular dividends from mutual funds can also provide regular income to the investors, but one should bear in mind that dividends are not assured and paid only from the accumulated profits of the funds. However, mutual fund SWP plan, assures fixed pay-outs on the chosen frequency as long as there are sufficient unit balances in the investor’s account.
  • SWP withdrawal from equity or equity oriented schemes is most tax efficient cash-flow solution in the long term as the profits of each withdrawal is subject to long term capital gains. As you know, the long term capital gains upto Rs 1 Lakh is totally tax free in a financial year and any gain above Rs 1 Lakh is taxed at only 10% rate.