Ashutosh Gupta highlights the fundamentals of setting up a systematic withdrawal plan (SWP)
I am retired but I still have a sizable equity portion in my portfolio. I have set up an SWP from it. Is it advisable to pause my SWPs from equity funds when there is a deep market correction to avoid selling a larger number of units than usual?
- Vikram R
Well, the SWP is generally a sound strategy to withdraw from equity when your goal is approaching. This is because if you wait till the last moment and markets correct sharply, then you can be stuck because of a deep value erosion in your accumulation. So, it's desirable to start withdrawing systematically from your equity investments at least over a year or a year and a half before the goal horizon to avoid any such situation.
Having said that, formulating an SWP purely from an equity allocation for your regular income may not be a very dependable strategy because, as he rightly said, in times of deep market corrections, he may end up depleting his accumulation too quickly which is avoidable. So, what he needs to do is set an asset allocation with a combination of debt and equity, with about 35-40 per cent in equity and the rest in debt. Once he sets up this portfolio, he can keep transferring about the next one-year income requirement into a liquid fund from where he can set up his SWP.
Now this debt-equity allocation will work favourably for him in times of a deep market correction where his concerns lie. Imagine a situation where the market is going through a deep correction right at the time where he is looking to transfer some of his accumulation into a liquid fund to set up an SWP. So, at that point, the equity allocation of his portfolio would naturally fall below his 35-40 per cent target allocation and therefore, he would naturally withdraw from his debt portion to fund his liquid-fund allocation. By virtue of this, he would be avoiding selling at a time when equity markets are low. Likewise, when equity markets are running high, he would end up redeeming from equity because that allocation will be higher from his 35-40 per cent range. So, that's the kind of portfolio that he can consider for his regular income.