What do you generally think about when investment funds come to mind? Obviously, the idea of investing, whether this consists of a one-time payment or regular instalments (See also:How does fund-based saving work?). The typical, simplified process is the following:
Select a fund that meets your personal needs (How do I find the right fund?). Hint: Schedule a personal appointment to take advantage of your advisor’s expertise at Tatra banka a.s.
Long-term investment over several years.
When the investment goal is reached, the fund units are sold.
Using funds for regular payouts
However, many investment funds can also be used in the opposite way: not as part of a savings plan, but instead as part of a payout plan, if they already have some capital available. In this case, there are regular payouts (e.g. monthly, quarterly) that can be used to supplement a state pension, to finance the education of a child or grandchild, or just to pursue one’s hobby. The rest of the capital remains invested in the fund. Basically, you can choose between two options for a payout plan:
Payout amount: You can set the amount of the regular payouts in accordance with your needs. The number of fund units that have to be sold to generate the desired amount then varies according to the market price of the units.
Unit payout: You decide how many fund units you want to sell on a regular basis. The payout amount is thus not fixed and varies depending on the market price of the units.
Payout plans – to preserve the capital or not?
The initial basis for a payout plan is the investment of capital in a fund with an orientation that meets your needs. This can be created with a larger one-time investment, for example following inheritance or payment of a life insurance policy. Or you have already saved up a bit of wealth, for example with fund-based saving. For regular payout plans, there are two options with regard to the invested capital.
A payout plan with possible capital preservation – and corresponding limitations on payouts; due to market developments, however, loss of capital is possible.
A payout plan for higher or longer payouts, in the course of which the invested capital is gradually reduced by sales of fund units; as the performance of funds varies, it cannot be predicted how long it will be possible to maintain the regular payouts.
Example calculation
If more capital is paid out than is replenished by the fund’s performance, it leads to a decline in the amount of capital invested. Let’s say the capital amounts to EUR 100,000 and was invested in a non-dividend fund. The payout plan calls for regular payments of EUR 5,000 annually, but the fund’s performance during the first year of the payout plan only amounts to EUR 2,000. As a result, EUR 3,000 of the payout will come from the invested capital, leaving EUR 97,000.
What you should pay particular attention to with a payout plan
Investors should understand that a payout plan is not an insurance benefit, in contrast to a state pension, in particular if the payout plan is conceived of as a form of supplemental monthly income.
There is no fixed interest rate involved, and the price risk is higher or lower, depending on the kind of fund selected.
With a payout plan, it must always be taken into account that the fund is invested in the capital markets. Despite the regular payouts, the remaining capital continues to participate in the market, along with the fund that is selected. Consequently, it is exposed to the relevant market risks and price volatility, and loss of capital is possible.
If the payout amount is to remain unchanged, performance variations in the underlying fund can have a significant impact on the payout duration.
Select a fund with an orientation that corresponds to your personal needs and reflects your investment strategy and comfort zone in terms of the balance between yield and risk. Your advisor at Raiffeisenbank a.s. will be more than happy to support you in finding the right combination of funds.