How to become an expert mutual fund investor: Don't forget the reverse gear

Over the years, a large part of the investment narrative in the mutual fund industry has focused on systematic investment plans (SIPs). And that's only natural, given the built-in growth in the Indian markets and a large population waiting to benefit from the wealth-creating potential of equities. However, market crashes like 2008 or March 2020 have highlighted that while it's important to invest regularly, you should also have an exit plan in order to protect your corpus from any abrupt market fall just when you need it.

The systematic withdrawal plan, or SWP, is the other side of the investment equation. It is the reverse of an SIP and helps you systematically exit equities. The process involved is simple - when you set up an SWP, a part of your accumulated corpus is transferred to your bank account monthly. Alternatively, you may also move the money to more conservative instruments such as short-duration debt funds with the help of systematic transfer plans (STPs) as your goal approaches. So, you don't exit from equity at one go rather over a period of time. Just as SIPs help you average your investment costs, SWPs help you average your withdrawal. This ensures that you don't sell out at the bottom. Of course, this also means that you don't sell out at the top either. But then, without the benefit of hindsight, who can tell when the market has made a top?

So, set up an SWP one or one-and-a-half years before your target date. In the case of non-negotiable goals like your child's education, you should start even earlier. Markets can be really wild and a sound withdrawal plan can go a long way in securing your goals. Further, if equities do witness a dream run and you achieve your target amount earlier, don't wait and shift your funds to safer debt instruments immediately. Don't fall for the lure of earning extra returns. Remember, your aim is not to earn the maximum possible returns (nothing of that sort exists!) but to accomplish the goal you have set out. If you wish, continue with your remaining SIPs but ring-fencing the achieved target amount is paramount.

Also in 'How to become an expert mutual fund investor' series:

Part 1: Know thyself

Part 2: Begin with the end in mind

Part 3: Balance is the key

Part 4: Avoid hitting bumps

Part 6: Cherry-picking funds

Part 7: Be a sage

This article was originally published on December 23, 2021.