If you started in January 2013 with Rs 1 Crore in Liquid Fund (say for example – ICICI Pru Liquid Fund) and did a SWP of Rs 50,000 monthly, then to date, you would have withdrawn a total of Rs 65+ lakh but your liquid fund portfolio will still have Rs 1.13 Crore.
That is how basically SWP is supposed to work. And ideally, SWP should be done from debt instruments only.
But can this be further optimized?
In situations where you don’t exactly need the full Rs 50,000 every month but it’s more like you definitely need Rs 35-40K but it will be good to have an extra 10-15K more each month (at least in a few months of the year when expenses shoot up). So basically your core requirement is 35-40K and the remaining 10-15K is good to have.
In such a situation, can you rethink the initial deployment for better portfolio outcomes?
Yes, it is possible, at least in some cases and for some (and not all) investors based on risk appetite and expense profile.
Let’s give it a try:
Note – This is not investment advice. The funds/categories chosen for this example are just for illustration purposes. Also, changes in starting dates will impact the results. Please talk to your investment advisor to discuss your investment requirements to help chart out a solid plan for chosen portfolio outcomes.
So let’s change the initial allocation a bit now. Say now, you started in January 2013 with Rs 70 lakh in ICICI Pru Liquid Fund and did a SWP of Rs 35,000 monthly and another Rs 30 lakh in ICICI Pru Equity & Debt fund (Hybrid) and did a SWP of Rs 15,000 monthly.
Result – To date, you would have withdrawn a total of about Rs 46 lakh from the Liquid fund and Rs 19.6 lakh from the hybrid fund. But your liquid fund portfolio will still have Rs 79 lakh and the hybrid fund will still have Rs 1.20 crore!
Not bad isn’t it? Compared to a pure Liquid fund scenario where you ended up with a residual Rs 1.13 Cr after Rs 65-66 lakh withdrawals over 11 years, in this case, you have almost Rs 1.99 Cr leftover after the same Rs 65-66 lakh withdrawals.
Reminder – This is just a simulation based on past data, without taking taxes or inflation-increasing expenses into account (for simplicity). So absorb this example with that in mind please.
So as you can see, if you are a bit flexible with your expenses and income requirements, i.e. meaning that you are okay to pause the hybrid fund SWP occasionally as the 15K anyways was not part of your core expenses and you could cut down your expenses a bit in case markets were going down a bit. If you can do that then you can better optimize your Rs 1 crore portfolio returns/outcomes for the same given SWP requirements. Easier said than done but still seems interesting.
Now the above combination of 70% in Liquid Fund and 30% in Aggressive Hybrid Fund is just one example. Depending on the individual’s situation and the market scenario when deploying initial lumpsum, the percentages may have to be changed. That said, never try to rely on fully doing SWP from pure equity funds if you require regular income and don’t have a very large initial corpus to begin with.
Related – Twitter long post on this (link)