Most investors continue to choose bank deposits as their preferred investment option after retirement, as the comfort of a regular, predictable cash flow is very necessary at that stage of their life. Often, in the quest for safety of capital, they land up unknowingly losing the fight against inflation, and consequently see the purchasing power of their fixed income eroding over time.

The challenge in SWPs from hybrid funds

As financial advisors, we know that an element of equity in their retirement corpus can help them in the long term win the battle against inflation quite comfortably. But then, the long term is a series of short terms. What all of us hope for is that the equity component first appreciates and only then gets buffeted by the inevitable market volatility, for if it happens the other way around, its quite possible that your retired client will pull out that money and go right back to bank deposits. It is quite a challenge for risk averse investors to continue SWPs from balanced funds and other hybrids, when the corpus has gone into negative territory. We can show as many charts as we like, but when they get anxious, their first priority is to resolve the anxiety of today rather than worry about what may happen 10 years down the line in terms of reduced purchasing power. This is a reality with a large number of risk averse retired investors.

So, what's the best solution in these circumstances? We at Vyana Wealth believe the ideal solution is a Long Term Regular Income Plan. It's a simple plan that may not decisively win the war against inflation, but can at least ensure that you don't lose the war, but stay in the game. You may not create wealth, but at least you don't erode it due to a combination of inflation and taxes.

The solution at hand a simple idea of an SWP from a low maturity debt fund. The primary objective of this plan is:

1. Low volatility in returns and marked to market valuations

2. Low taxation, as tax is only applicable on the gain on the units redeemed every month (see chart)

3. Exit load waiver on the SWP amount, thus no charges for monthly SWP

4. Complete or partial liquidity as funds are available back in T+1, exit load of 1-2% will be applicable, which is much lower than bank's penal charges

5. Growth of principal over time

6. Step up SWP in the future if the surplus in the fund so allows

7. Low reinvestment risk as fund managers manage the average maturity of the fund

The other investment options with similar objectives are: Corporate Bonds, Corporate Fixed Deposits, Tax Free Bonds and LIC annuity plans. There is a comparison with these products:

Here is an actual working of an SWP from a fund that fits the investment profile and has also waived exit load from SWPs.

Debt Funds Returns with exit load waiver on SWP:

Other customer segments for this solution

1. Real Estate investors who look for rental income. Here no hassle of finding tenants, following up for payments and paying various taxes on the rent

2. Charitable Trusts and hospitals, who have large trust corpus and need regular cash flow for meeting their obligations

3. Housing Societies who have a deposit corpus and need monthly income for meeting maintenance expenses

4. Clubs who have a large membership corpus and require monthly income for meeting regular expenses for events, maintenance and salaries

5. Corporates who have cash holdings and require a regular income for various statutory expenses

6. Individuals and families who have received an inheritance or sold a property and are looking for a steady income

7. Life insurance claimants, who have lost the breadwinner. The insurance claim can be used to earn a steady monthly income

Next steps

What we need is for all fund houses who are active in the accrual funds space to waive exit loads on SWPs, to enable us to offer more choice to investors for our Long Term Regular Income Plan. There is a Rs.90 lakh crore opportunity in the form of bank deposits that is available for us to address, if we can come up with customer centric solutions. We need to work together to create awareness of sensible retirement solutions using low risk debt funds. Raising awareness is the first step towards winning the battle against bank deposits. We know our solutions are better for our investors, its just that we need to get smarter in the way we structure and communicate our solutions to them.

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