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Mutual Fund plan for a just retired person

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Being Just Retired, we have handful of cash in hand.

But, unfortunately, we do not have a right plan in place.

Most Just Retired persons will go for Bank Fixed Deposits only to realize later that they pay a huge part of their interest as Income-tax.

Now, lets assume we have a just-retired person with a corpus of, say 10L, to live with.

The requirement

The idea is to get monthly income in the most assured manner as possible.

Preferably, in the form of dividends so that the main corpus money is in tact.

Dividends are tax-free in the hands of the individual.

Further, another goal in this planning is capital-appreciation, if possible.

Atleast so much so as to beat the inflation.

Finally, one more requirement is that the corpus should be safe so as to meet any medical emergency.

This cannot be ignored because it is in white-hair days that we get health issues and require immediate treatment.

Derisking from asset classes

Coming back to our just-retired guy, I will break my money into 4 parts from four different asset classes.

The idea is to diversify so that I do not depend on a single asset class.. sort of de-risking

Now, for the retiring guy, my choice of four scheme types are:

1. Monthly Income Plan (with monthly-dividend payout)

2. Dynamic Bond Funds (with quarterly-dividend payout; acts as a top-up)

3. Arbitrage Funds (with monthly-dividend payout; acts as a top-up)

4. Equity-oriented Hybrid fund (with quarterly-dividend-dividend payout)

In all the cases, i will chose DIRECT Plan - DIVIDEND Plan - Monthly Dividend Payout option


I know, this is not a tax-efficient plan but the core focus is on getting regular income rather than tax saving / emergency

We should have planned for retirement well in advance (or atleast 2 or 3 years in advance) but this is missed.

To be safe, we will diversify each of the fund-type to a different AMC. This helps in de-risking from being dependent on a single AMC

Practical implementation

Since the corpus is of Rs. 10L, we will put 2.5 Lakhs in a liquid fund fund first. And then transfer funds regularly to the targeted scheme.

For instance, for plan # 1, i will put Rs. 2.5L in a liquid fund and then give an instruction so that, say, Rs. 10k gets moved to the targeted MIP plan

Now this may sound difficult and redundant but the idea is to get cost-averaged units in the targeted MIP scheme

So, in 25 weekly installments, all the money will get transferred to the target MIP scheme

25 weekly switches = approximately 5 months

If you feel this is difficult to execute, you may increase the weekly switch from 10k per week to 20k per week.

The same activity can be done for Plan #2 Dynamic bond funds and #4, Equity-oriented Hybrid funds

Arbitrage funds does not require any temporary liquid scheme. So the Rs. 2.5 L can be directly invested in them

Scheme selection

Now lets come to the choice of schemes

We will pick one AMC per plan

Plan #1: Monthly Income Plan (with monthly-dividend payout): Birla Sun Life Monthly Income Plan II - Wealth 25 Plan

Plan #2: Dynamic Bond Funds (with quarterly-dividend payout; acts as a top-up): One of ICICI Prudential Long Term Fund or Quantum Dynamic Bond Fund

Plan #3. Arbitrage Funds (with monthly-dividend payout; acts as a top-up): One of Reliance Arbitrage Fund or IDFC Arbitrage Fund

Plan #4. Equity-oriented Hybrid fund (with quarterly-dividend-dividend payout): HDFC Balanced Fund or ICICI Prudential Balanced Fund or L&T India Prudence Fund

How much return will i get?

Mutual Funds, as per regulations and their nature, cannot guarantee returns.

Hence there is no way one can give a precise number for the returns.

Depending on the market conditions, you may get returns of, on an average, % 11 to 12% per annum.

The quantum of dividend payout varies from scheme to scheme and month to month depending on the performance of the scheme.

In the Plan #1 above, the payout will be low initially and will reach its peak in the 5th month once all liquid money goes into MIP Scheme.

Alternative plan

Assume you have good corpus and you do not actually depend on the retirement corpus you just received.

You just want to safe guard the money and enjoy monthly returns and capital appreciation.

In this case, invest your corpus into an Arbitrage scheme and then give a STP instruction to gradually transfer the money into a Equity-oriented Hybrid fund.

The period for transfer from Arbitrage scheme to the Equity-oriented Hybrid fund can be on a weekly or fortnightly basis.

Do the STP for as long as possible.

Because Equity-oriented Hybrid fund will have up to 65% exposure in equity schemes, the dividends and gains (when you redeem) will be treated as equity capital gains which are tax-efficient (compared to debt-schemes and other traditional instruments like bank fixed deposits).

Equity-oriented Hybrid fund carry moderate risk and give moderate returns - something that is important for post-retired people.

For other detailed information as to how these schemes work, read Balanced Funds

Things to do

Study the schemes and see if the desired monthly / quarterly-dividend payout options are there or not. I just gave the names that i feel are good and those i can recall.

Discuss about this plan with your financial advisor, tax consultant, chartered account and friends and then take a decision only after thorough analysis and consultation.

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