An unexpected layoff, medical condition, unpaid sabbatical can severely impact your cash flow. At such a time, having a backup emergency fund or investments can really come to your rescue.
For such situations, it is always recommended to keep an emergency fund. A small part of your regular income, emergency funds are usually meant to cover three to six months of expenses. However, if you do not have such a fund and are relying on mutual fund withdrawals, it can still work out.
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Assuming you have Rs 10 lakh saved in mutual funds. You can opt for systematic withdrawal plans (SWP) that allow you to take out a portion of your corpus regularly, while the remaining fund continues to grow and earn returns.
How much this corpus will last depends on your expenses. If your expenses are low, you can withdraw from your mutual funds without meaningfully denting your corpus. For people with high expenses, the impact may be more.
Withdrawing Rs 25,000 Per Month For 1 Year:
Invested Amount: Rs 10,00,000
Withdrawn Amount: Rs 3,00,000
Returns on Corpus: 12%
Time: 12 months
Returns from your investment: Rs 1,03,838
Balance Value: Rs 8,03,838
This means that after 1 year, you are still left with Rs 8 lakh corpus.
Withdrawing Rs 50,000 Per Month For 1 Year:
Invested Amount: Rs 10,00,000
Withdrawn Amount: Rs 6,00,000
Returns on Corpus: 12%
Time: 12 months
Returns: Rs 87,675
Final value: Rs 4,87,675
This means that you will be left with Rs 4.8 lakh balance after the first year of withdrawals.
Based on online calculators, it is possible to withdraw a maximum of Rs 87,000 per month for this corpus to last one year.
Investors also need to understand that this calculation assumes that the fund grew at 12% during the year. However, mutual fund investments are risky with no guaranteed returns. If the market remains unfavourable during your withdrawal period, you will run out of your funds faster than estimated.
This is why it is recommended to build an emergency fund, covering at least six months of expenses to avoid such financial situations.
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