Planning retirement & child's education through mutual funds? Expert explains SWP, taxation, portfolio rebalancing

Building a corpus for a child's higher education and planning for your retirement are two of the biggest long-term financial goals for most investors. While equity mutual funds can help create wealth over long investment horizons, choosing the right investment strategy, maintaining a diversified portfolio, and reviewing investments periodically are equally important.

Investors also need to understand whether a lumpsum or SIP approach suits their goals and how retirement income can be generated efficiently through a Systematic Withdrawal Plan (SWP).

A 40 year old investor has Rs 10 lakh available for investment reached out to ETMutualFunds and sought advice on the corpus he wants to build of over Rs 1 crore for his daughter's education over the next 15 years. He wanted to know whether he should invest the amount as a lump sum or through SIP and which equity mutual fund categories would be suitable.


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He is also planning to retire by 55-58 years of age and the total target corpus is Rs 2 crore plus. The investor wants to know if this corpus will be achieved or the portfolio needs rebalancing and he wants to know about SWP with taxation at retirement.

In other words, he sought advice on planning for his daughter's education, reviewing his retirement portfolio, and understanding how SWP works after retirement.

His lumpsum investments include Rs 6 lakh in Tata Mid Cap Fund, Rs 5 lakh in Quant Mid Cap Fund, Rs 4 lakh in Motilal Oswal Midcap Fund, Rs 3 lakh in Bandhan Small Cap Fund, Rs 1.5 lakh in Quant Small Cap Fund.

The SIP investments include Rs 6.5 lakh in Canara Robeco Midcap Fund (Rs 30k SIP), Rs 5.7 lakh in Tata Small Cap Fund (Rs 40k SIP) and Rs 3.7 lakh in Quant Small Cap Fund (Rs 30k SIP).

Planning for daughter's education

An expert, Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance analysed the portfolio and told ETMutualFunds that a 15-year investment horizon is well suited for equity mutual funds because it allows investors to benefit from long-term compounding.

Since the investor already has Rs 10 lakh available, the expert advised investing the amount through a Systematic Transfer Plan (STP) over six to twelve months instead of investing the entire amount at one go or keeping it idle while starting a SIP. This approach can help reduce market timing risk.

The expert also pointed out that the investor's existing portfolio is already heavily tilted towards mid-cap and small-cap funds. Therefore, the fresh investment should be directed towards more diversified categories such as Flexi Cap, Large & Mid Cap, or Multi Cap funds.

However, the expert cautioned that Rs 10 lakh alone will not be sufficient to achieve the desired education corpus.

Assuming a 12% annual return, the investment would grow to around Rs 55 lakh over 15 years, well below the target of more than Rs 1 crore. To bridge this gap, the investor should also start a monthly SIP of around Rs 11,000, the expert recommended.

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Retirement portfolio: On track or needs rebalancing?

According to the expert, the current portfolio is overly concentrated in mid-cap and small-cap funds, with several schemes belonging to similar categories. Although such a portfolio may perform well during strong market rallies, it is also exposed to sharper corrections during periods of market volatility.

At the age of 40, maintaining a high equity allocation is appropriate because of the long investment horizon. However, diversification is equally important.

The expert suggested gradually consolidating the portfolio into a more balanced mix of Flexi Cap, Large & Mid Cap, Multi Cap, Multi Asset and Mid Cap funds, while limiting the allocation to small-cap funds.

The expert also noted that retirement planning should not focus only on achieving a target corpus but should also account for inflation, future expenses, increasing life expectancy and periodic portfolio reviews.

Whether Rs 2 crore will be sufficient depends largely on the investor's post-retirement lifestyle and spending needs.

Considering an inflation rate of around 6% and a life expectancy of nearly 90 years, the expert estimated that a corpus of Rs 2 crore may translate to only around Rs 30,000 per month in today's purchasing power after adjusting for inflation. Therefore, the adequacy of the corpus would depend on the investor's lifestyle and withdrawal requirements.

How does SWP work and what is its taxation?

The investor also wanted to understand how a Systematic Withdrawal Plan (SWP) works after retirement and how withdrawals are taxed.

The expert explained that an SWP allows investors to withdraw a fixed amount at regular intervals, while the remaining investment continues to stay invested and has the potential to grow.

Each SWP withdrawal consists of two components—the investor's original capital and the gains earned on the investment. Tax is applicable only on the capital gains portion of each withdrawal and not on the entire amount withdrawn.

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For equity mutual funds, the gains are taxed according to the capital gains tax rules applicable at the time of each withdrawal.

The expert added that when planned properly, an SWP can provide a steady and tax-efficient source of retirement income, making it a preferred withdrawal strategy for many retirees.

Review emergency fund arrangements

The investor mentioned that emergency funds are currently parked in fixed deposits held in his parents' account. The expert suggested that, ideally, emergency funds should be maintained in the investor's own name or jointly with appropriate nominations so that the money remains readily accessible during emergencies.

The expert also pointed out that fixed deposits attract penalties on premature withdrawals and the interest earned is taxable every year.

Instead, investors may consider keeping their emergency corpus in liquid funds, ultra-short duration funds or arbitrage funds, which offer relatively better liquidity and may be more suitable for emergency requirements.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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