How to get regular monthly returns with capital appreciation in the long term?

In the case of pure equity funds, SWP can’t be started immediately and the investors need to wait for 5-7 years to start regular monthly withdrawals.

To ensure increasing contributions on regular basis to a philanthropic organisation – that preaches non-begging and never asks general public for any donations and only allows people, who believe in its cause, to contribute to its educational branch – to establish an engineering institution, a dedicated disciple has suggested other disciples to make lump sum investment in the UTI Nifty50 ETF and start a systematic withdrawal plan (SWP) from the very next month.

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According to him, by starting SWP directly in favour of the educational branch, the disciples would be able to make regular monthly contributions. Moreover, the equity investment would also help in generating superior gains in the long term that would help them in increasing the contributions to keep pace with the enhancement in construction and running cost due to inflation.

However, pure equity funds are volatile in nature and may even give negative returns in the short term. Withdrawals in such a situation may erode the capital invested rather than providing long-term capital gain.

So, is it a good idea to invest in the UTI Nifty50 ETF or any other pure equity fund for this purpose?

“While equities as an asset class usually beats debt, fixed income and other asset classes by a wide margin over the long term, equities can be very volatile in the short-term. Hence, equity fund investments should always be aimed for long term wealth creation and not for generating regular monthly income. Opting for dividend option in equity funds would be a sub-optimal choice as there is always an uncertainty regarding dividend declaration, and the dividend payout may not match the monthly cash inflow requirement of the investor. Moreover, the dividend option is tax inefficient as the mutual fund dividend receipts are taxable as per the tax slab of the investor,” said Sahil Arora – Senior Director, Paisabazaar.com.

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According to Arora, instead of pure equity funds, debt funds would solve the purpose better.

“Investors seeking to immediately generate monthly income from their investible surpluses should invest their surpluses in short-term debt funds and activate Systematic Withdrawal Plan (SWP) in those funds. Use online SWP calculators to find out the lump sum investment required in short term debt funds to generate required monthly income, after assuming an average rate of return generated by the short term debt funds over the next 5-7 year period. The rest of their investible surpluses should be invested in equity funds for wealth creation,” said Arora.

“Short-term debt funds invest in debt securities having shorter maturity profile and hence, have lower risk of capital erosion caused by rising interest rate regime than medium or long term debt funds. Investors can further reduce the risk of capital erosion by investing in short term debt funds having highest possible exposure to the sovereign, quasi-sovereign and highest rated corporate bonds,” he added.

In the case of pure equity funds, SWP can’t be started immediately and the investors need to wait for 5-7 years to start regular monthly withdrawals.

“Investors having at least 5 years and preferably 7 years or more in hand before requiring monthly cash inflow from their investments should opt for equity funds. The best example of such investors would be those in their 20s, 30s or 40s investing for creating their post-retirement corpus. Once they are about 2 years from their retirement age or the stage requiring monthly withdrawals, they should activate the Systematic Transfer Plan (STP) to steadily shift a predetermined amount to short term debt funds from the equity funds each month. Once they reach their retirement age or the stage requiring monthly cash inflow, activate SWP in the invested short term debt fund. Following this method will ensure continued exposure to equities and the higher returns generated by equity funds will increase the longevity of the investment corpus,” said Arora.

So, no one should invest the funds needed in the short term in equity and need to manage the investments well to meet their specific financial goals.

As most of the disciples would be unaware of the risks associated with mutual fund investments – especially of equity funds – it’s better to manage the contributions given collectively by some experienced persons.