Although a majority of individuals, especially youngsters tend to focus more on short term goals, they miss out on the fact that retirement planning is part of financial planning. Remember that you are going to need more money when you retire then you need now. That’s because retirement is a phase where all your major income sources come to a standstill. The only revenue is a provident fund or pension (that too if you are eligible for one). Hence, it is essential to build a retirement corpus and make it part of your financial planning. Before investing in any investment scheme, it is better to chart an investment plan so that you can spread your investments smartly.
Remember that investing is a long journey and you need to be patient with your investments and always take an informed investment decision. To understand what schemes suit you better it is to understand your risk appetite. When you know your risk appetite you might be able to understand how much you can risk with a potential investment that may benefit you in the long run. There are some individuals with zero risk appetite and usually settle with conservative investment options that offer low fixed interest rates. They are more comfortable settling with low interest rates rather than exposing their finances to the dangers of direct/indirect equities. However, if you are one of those who do not mind giving their investment portfolio a slightly aggressive approach to build a decent corpus, in the long run, they may consider investing in mutual funds.
Today, let us understand mutual funds and how SWP from hybrid mutual funds may turn out to be a smart investment. Let’s begin with understanding mutual funds:
What is a mutual fund?
SEBI, the regulatory body of mutual funds in India describe them as, “Mutual funds are a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”
The put it in simpler words, a mutual fund is generally owned and managed by an AMC
(Asset Management Company) or a fund house. What AMCs do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy in various sectors and industries. The money is invested in equity related instruments like stocks and other marketable securities like debt securities, corporate bonds, certificates of deposits, commercial papers, T-bills, etc. It is said that the performance of a mutual fund depends on the performance of its underlying assets. Mutual funds usually carry a diversified portfolio and allocate their assets depending on the risk profile and investment objective of the scheme.
Mutual funds are categorized by SEBI so that investors have a clear idea about each of the schemes that have different investment strategies, asset allocation, risk profile, etc. and invest in a scheme that may fit their investment objective. Mutual funds are broadly classified as equity, debt, hybrid, solution oriented and other schemes.
Let us find out more about hybrid funds.
What is a hybrid fund?
While equity funds invest majorly in equity related instruments and debt funds predominantly invest in debt related securities, hybrid funds aim to balance their portfolio by investing in both equity and debt instruments. Whether a hybrid fund will be more equity oriented or debt oriented may depend on the investment objective of that scheme.
What is an SWP and why should one consider opting for it?
Currently, many of us rely on investment options that generally offer unattractive capital appreciation. These yield suboptimal results as they are not only taxable but result in high penalty charges in case of premature withdrawal. Hence, if you wish you may invest in a hybrid fund and opt for the systematic withdrawal.
Systematic Withdrawal Plan or SWP is a powerful tool that works just like SIP. But here, instead of investing at regular intervals, an investor can withdraw at regular intervals. The withdrawals can be customized depending on the investor’s financial needs. SWP allows you to withdraw a specific amount at predetermined intervals from the amount you invested in a hybrid fund. When in-need for consistent cash flow and meet regular expenses, the amount to be withdrawn and the frequency is fixed by the investor.
Hybrid funds are supposed to be naturally diversified as they invest in both equity and debt. Hybrid funds are good for those who are planning for long-term goals such as child’s education or even retirement with a vision of getting long term capital appreciation. Hybrid funds may prove to be an effective combination to achieve those financial goals.
Investing in mutual funds may be a good option for meeting long term goals, but if you are new to investing and financial planning in general, it is always good to seek the help of a financial advisor.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.