Should I invest in lump sum or STP to draw regular income through SWP

Thanks for the kind words about Advisorkhoj which we truly appreciate.

Very glad to hear that your experience of investing in mutual funds have been very good and you made good return on your investments. Your idea of accumulating a corpus, invest in balanced funds and draw a regular income through SWP is quite a good idea. However you need to note the following in case of SWP from balanced funds –

1. The profits made on all the SWP withdrawals from balanced fund upto 12 months from the date of investment will attract short term capital gains tax which is currently at 15%. To avoid this, you can start the SWP after 12 months and in that case capital gains will be tax free. Like equity funds, long term capital gains on balanced funds are also tax free.

2. However, if you need regular income immediately and do not want to pay the above short term capital gain tax, you can invest a portion of the lump sum amount in a liquid fund or ultra-short term fund and start drawing a fixed amount immediately. For example – you want to invest Rs 10 Lakhs and draw Rs 7,500 per month from balanced funds. You can split the investments in two parts –

1) Invest Rs 90,000 in a liquid fund/ ultra-short term fund and draw Rs 7,500 per month during the first 12 months and exhaust the entire investment. However, even after withdrawing your entire investment, some amount will be left in the folio which is your gain from the investment in liquid/ ultra-short term fund. The gains made on liquid/ ultra-short term fund will be added to your income and taxed according to the income tax slab applicable to you.

2) While investing Rs 90,000 in liquid funds, ensure that you invest the remaining Rs 910,00 on the same date in balanced funds and start SWP after 12 months. All the SWP withdrawals after 12 months, from balanced fund will be tax free. The gains made on liquid/ ultra-short term fund will be added to your income and tax to be paid according to the income tax slab applicable to you.

3. The other thing you need to keep in mind is that you should not draw more than 9-10% during the first 2-3 years of your investments in balanced funds. Withdrawals can be increased in future depending upon how the fund performs over a period of time.

4. As your investment horizon is 10-15 years, you should invest in one go, lump sum. There is no need to time the market through SWP/ SIP etc. Just invest the entire amount in good balanced fund schemes, wait for 12 months and start the SWP withdrawals at rates suggested above.

With regards to top performing balanced funds, you can consider investing in ICICI Prudential Balanced Fund, HDFC Balanced Fund, L&T Prudence Fund and DSP BlackRock Balanced Fund. You may check their past performance from here https://www.advisorkhoj.com/mutual-funds...

For additional investments in equity funds, we suggest that you go with large cap funds - SBI Bluechip Fund, Kotak Select Focus Fund and Birla Sun Life frontline Equity Funds could be good choices in the large cap fund category.

Hope you find the above useful. Thanks for writing to Advisorkhoj.