Retirement is when your regular income in the form of salary stops, while monthly expenses continue, assuming you want to maintain your existing lifestyle.

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A retirement corpus for most people would comprise provident fund, bank deposits, mutual funds and other traditional savings. Now is the time you need to plan to make optimal use of the corpus at hand. The prime objective is to ensure a regular and tax efficient flow of income every month, to take care of your expenses.

MFs can provide regular income and potentially generate capital appreciation.

For your need for regular income, you can consider investing in an open-ended debt/ debt hybrid fund, and avail the Systematic Withdrawal Plan (SWP) facility. Through SWP you can get regular income, as it enables monthly withdrawal of a fixed sum from your investment for the set tenure. The other benefit is that even while you avail your monthly inflows, your balance investment is positioned to generate potential returns.

Given the high interest rate regime, it would be advisable to create a portfolio - mix of Fixed Maturity Plans and an open-ended debt/debt hybrid fund.

Basically, FMPs are close-ended debt MF schemes, which lock-in the returns at current yields. With FMPs you get your capital back along with the appreciation at the time of maturity.

Another key benefit of debt funds is that they attract Long-Term Capital Gains (LTCG) for investment above three years. As per current tax laws, LTCG tax is 20.8% (including 4% cess) post indexation. Indexation is the process, in which inflation during the period is reduced from the returns and tax is payable only on the final amount.

Let’s assume that you have a retirement corpus of Rs 1 crore, which is invested equally in an FMP and open-ended debt scheme.

The illustration shows the result of this portfolio:

From the calculation you can see that, in spite of withdrawing Rs 18 lakh through the SWP facility, at the end of the three-year period the original principal has appreciated to over Rs 1.04 crore. Tax as a percentage of total investment stands at 2.21%.

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Alternatively, an investment in a bank fixed deposit in August 2015, at the then prevailing interest rate of 8.75%, would earn 6.39% post tax returns, without monthly inflows.

BY: D P Singh

(The author is ED & CMO of SBI MF)

SOURCE: DNA Money