One of the key objectives of investment is to meet your needs financial objectivesAnd if you have already achieved them, what should be your course of action?
The standard answer would be: Redeem your investments and withdraw the money so that you can use it for your goals. However, this is not recommended, at least in most cases. Let’s see why.
The following are the key factors that determine whether you get your investment back in one go or opt for SWP or Systematic withdrawal plan:
TO. Category of objectives: There are two types of financial goals that investors tend to save for: retirement and defined objectives (short or medium term), such as paying a child’s university tuition or buying a car.
If the goal is defined, for example, you have been saving to accumulate ₹10 lakh for a specific purpose, then the decision to redeem it in a lump sum may be justified.
B. Market timing:When the market is going through a bearish phase, one tends to be afraid of bailing out the investment all at once, which is why one is attracted to a SWP. On the other hand, when the market is bullish, the investor tends to be incentivized to bail out all at once.
I. Category of objectives
Defined objectives:
If you have another goal besides retirement, you know exactly how much money you need.
“As far as goals are concerned, it makes sense to opt for SWPs in 3-4 parts, say 25 per cent every three months, thereby withdrawing the entire money over a period of one year,” says Amol Joshi, Founder, Plan Rupee Financial Services.
Saving for retirement
Once you’ve accumulated enough money for retirement, it doesn’t make sense to cash it out in a lump sum. Wealth advisors recommend that retirees cash out their money through SWP because it serves two purposes: A) You’re not going to use the money all at once, so you should withdraw it at the pace you spend it. B) By deferring withdrawal, you can maximize your return on investment.
“We recommend SWP primarily in hybrid funds, balanced advantage funds or equity savings funds. It is suggested to withdraw 8 per cent annually (quarterly withdrawals) to ensure annual income,” says Sridharan S, Founder, Wealth Ladder Direct.
“Retirement will last anywhere from 5 to 20 years or even longer. So what is the point of cashing out everything and putting it all in a savings account that will only give you 2-3 per cent?” Joshi adds.
II. Market synchronization
If the market is volatile, it is usually not recommended to cash out large investments. However, when it comes to long-term investments, the timing of the market is insignificant when it comes to achieving financial goals.
For investors who are concerned about the timing of the market at the time of redemption, Joshi says, “The capital should have been invested for several years before retirement, so the exact timing of the market at the time of redemption does not matter much.”
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