“But what if the market is in a terrible condition when the timeline of my goal is nearing and I am about to redeem my equity investment?” For investors who shy away from equity investments owing to the risks involved, the fear of their returns being wiped out at once if the markets enter the meltdown territory at the time when they would have to withdraw their investments is a real concern.

When investments in pure equities seem too daunting, aggressive hybrid funds can be a suitable alternative. Aggressive hybrid fund invests about 65 to 80 percent of its assets in equity and equity-related instruments and the remaining 20 to 35 percent investments can be in debt instruments. This ensures that as in investor you get the best of both worlds – the potential to earn high returns through the equity component and a certain level of stability in your portfolio owing to the presence of the debt component in the fund.

Besides the cushioning impact that aggressive hybrid funds offer due to the investments in debt instruments, another feature that makes these funds highly suitable for investors who are averse to investing in high stakes equities is the systematic withdrawal plan.

SWP refers to Systematic Withdrawal Plan which allows an investor to withdraw a fixed or variable amount from a mutual fund scheme on a pre-determined date based on a chosen frequency sch as monthly, quarterly or semi–annually. In a way SWP can be described as the antithesis of SIP (systematic investment plan) wherein a certain amount is deducted from your savings account on a fixed date and is invested in your mutual fund while in the case of SWP, a preset amount is redeemed from your mutual fund and transferred to your bank account.

Here is an example: suppose you own 8,000 units in a mutual fund scheme and you have opted for an SWP through which you want to withdraw Rs 5,000 monthly.

Assuming on the first day of the month, the NAV of the scheme is Rs. 50.

Equivalent number of MF units = Rs. 5,000/Rs. 50 = 100

100 units would be redeemed and Rs. 5,000 would be given to you.

Your remaining units = 8,000 - 100 = 7900

Now, on the first day of the next month, the NAV is Rs. 45. Thus, equivalent number of units = Rs. 5000/Rs. 45 = 111

111 units would be redeemed from your MF holdings, and Rs. 5,000 would be given to you.

Your remaining units = 7900 - 111 = 7789

This process will continue till you have redeemed your entire investment amount.

• SWP is a great option for those who have retired or are nearing retirement as it helps generate regular income. SWP affords flexibility to investors as you can change the withdrawal amount according to your requirement. It is also a superior substitute to the dividend pay-out option of mutual funds – instead of having to rely on the asset management company’s (AMC) chosen dividend amount, with SWP you can choose how much you want as income every month.
• When making a lumpsum withdrawal of mutual fund investments, there is a possibility of your overall returns being impacted because in instances when you do not utilize the capital immediately or invest it somewhere else, you may have to park it in a bank account. Now if that amount would have stayed invested, it would have fetched better returns. With SWP you can ensure that your withdrawals happen in a systematic way and you only withdraw the amount that you require while the rest stays invested. Since aggressive hybrid funds invest in equities majorly, this ensures that you can continue to reap the benefit of compounding what with a portion of your capital remaining invested.
• By opting for an SWP, you can also mitigate the timing risk entailed in redeeming investments at lower valuations. This is because the redemptions are phased over a period of time and happen across varying market conditions wherein more units can be withdrawn when the markets are high, and a greater number of units are redeemed when the markets are lower. This reduces the possibility of your redemption value becoming a matter of luck by virtue of being entirely dependent on the conditions of the market at the expected time of withdrawal from your investment. Hence the need for timing the markets is eliminated and what with there being a debt component in the portfolio of aggressive hybrid funds, this minimizes the chances of your capital being eroded at one go.


Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.