As I have mentioned in my earlier article…one of the best ways to generate regular income is to do a SWP(systematic withdrawal plan) in mutual funds, where you invest a lumpsum with a Debt or Hybrid/Balanced fund and withdraw a certain amount monthly. The yearly withdrawal ideally should not exceed 7-8% of the fund value…This ensure that you get monthly cash flows and your principal amount is protected and grows in value over a longer period of time.
This is what I recommend for most of my clients but recently I met a client who wanted regular cash flow but wanted an aggressive strategy, had a long time horizon and was willing to take risk. So I started back-testing some aggressive funds. I took some of the best and consistent performing funds in each of the category and back tested it for the last 5 yrs.
If you had invested Rs 75 Lakhs on 1st of April 2013 and had withdrawn Rs 50,000 every month for the next 5 yrs….here is how the numbers would stack up…
| Lumpsum Amount | 75 Lakhs |
| Investment Date | 1st Apr 2013 |
| SWP Date | 10th |
| Monthly Withdrawal | Rs 50000 |
| Scheme | Category | Withdrawal Period | No of Monthly Installments | Total Withdrawal Amount | Current Value as on 10-04-2018 | Return (%) |
| Reliance Small Cap Fund – Growth Plan – Growth Option | Small Cap | 02-05-2013 to 02-05-2018 | 60 | 30,00,000 | 2,94,68,790 | 37.13 |
| L&T Mid Cap Fund-Regular Plan-Growth | Mid Cap | 02-05-2013 to 02-05-2018 | 60 | 30,00,000 | 2,27,07,800 | 30.83 |
| Aditya Birla Sun Life Advantage Fund – Regular Growth | Multi Cap | 02-05-2013 to 02-05-2018 | 60 | 30,00,000 | 1,66,08,811 | 23.78 |
| Kotak Select Focus Fund – Growth | Large Cap | 02-05-2013 to 02-05-2018 | 60 | 30,00,000 | 1,54,74,169 | 22.26 |
| SBI Magnum Balanced Fund – REGULAR PLAN -Growth | Balanced | 02-05-2013 to 02-05-2018 | 60 | 30,00,000 | 1,29,49,099 | 18.55 |
| HDFC Equity Savings Fund -Growth | Equity Savings/hybrid | 02-05-2013 to 02-05-2018 | 60 | 30,00,000 | 85,96,780 | 10.68 |
As you can see, while you would have taken Rs 50K every month, you still end up with more than double your principal amount in most of the funds, and in case of the Reliance small cap fund you almost touched 3 Cr.
This worked so well as we were in the bull phase and markets kept climbing up. If the markets were not this good or if you had invested at the peak before the crash, there is a risk of loss as well. So, don’t attempt to do this especially with small/mid cap funds…unless you consult your adviser and understand the risk.
Here is an example, where one would have invested at the peak of the market before the crash…
| Lumpsum Amount | 75 Lakhs |
| Investment Date | 1st Nov 2007 |
| SWP Date | 10th |
| Monthly Withdrawal | Rs 50000 |
| Scheme | Category | Withdrawal Period | No of Monthly Installments | Total Withdrawal Amount | Current Value as on 10-10-2012 | Return (%) |
| HDFC Equity Savings Fund -Growth | Equity Savings/hybrid | 10-11-2007 to 10-10-2012 | 60 | 30,00,000 | 78,70,968 | 9.28 |
| L&T Mid Cap Fund-Regular Plan-Growth | Mid Cap | 10-11-2007 to 10-10-2012 | 60 | 30,00,000 | 42,01,353 | -1.03 |
As you can see, an aggressive fund can negatively impact your initial investment in case of a market crash…but a conservative fund is able to protect your principal.
As I mentioned earlier, doing SWP with a Small/midcap can be very risky…but if some one still wants to do it…here are few pointers…
- Don’t hurry – Check market valuations especially small and midcap index – currently markets are expensive…wait for markets to reach decent valuations. Keep the funds ready.
- Keep a long time horizon – As this is small/midcap, keep at least 10+ years
- Keep a 2-3 yr leeway – Suppose you had planned for 10 yrs and if there is a market crash in the 10th year…you should be able to wait till the market recovers. Ideally you should start looking for opportunity to cash out from 8th year onwards.
Yes this involves a little bit of timing the market as we need to try and minimise the risk and as I said, this is not for the faint hearted and should not be done unless you have an adviser who understands and tracks the market closely.
For everyone else, do the SWP using a conservative fund which is still one of the best ways to generate regular income.
Hope this was helpful…We can help you plan & invest for any or all of your financial goals…email or call to book an appointment for a discussion – Invest@smartserve.co / 9916804769
We also have a Telegram group to discuss and share matters related to Investments – Stocks, Bonds, Mutual funds and all aspects of Personal Finance. I invite you to join the group by clicking on the below link…
https://t.me/joinchat/I4WECg9uRygPBedJkHJGZA
Happy Investing
Robin