Topic 4: Mutual Fund Systematic Withdrawal Plan: A smart long term income solution
What is SWP? And how can it help in financial planning?
In Systematic Withdrawal Plan (SWP), you can draw a fixed amount from your mutual fund investment at a specified frequency (monthly, quarterly, annual etc); you can specify the day of the month when the withdrawal should be made and the amount will be credited directly to your bank account on the specified day. You can continue your SWP as long as there are balance units in your mutual fund scheme account.
Over the last 4 – 5 years with growing popularity of mutual funds among retail investors, dividend paying schemes have attracted a lot of investor interest. Several mutual schemes have maintained good monthly dividend pay-out track records over the last few years and are seen as good investment options for regular income. However, investors should know that mutual fund dividends are paid at the discretion of the fund house and are not guaranteed unlike FD monthly interest.
Investors should understand that as per SEBI regulations, dividends can paid only from the accumulated profits of a scheme. In a prolonged market downturn, schemes which continue to pay regular dividends, may deplete their reserve of accumulated profits and may not be able to declare dividends until conditions improve.
Systematic Withdrawal Plans is a smart investment option for investors who need regular income from their investments because of the following reasons -
How does Systematic Withdrawal Plan work?
Systematic Withdrawal Plan generates cash-flows (income) for investors by redeeming units of mutual fund scheme at specified intervals. The number of units redeemed to generate cash-flows in an SWP depends on the SWP amount and the scheme Net Asset Values (NAV) on the withdrawal dates. In an SWP, your unit balance will diminish over time, but if the NAV grows at a faster rate than your withdrawal rate in the long term, then your investment value will be higher resulting in capital appreciation, intermittent volatility not with standing.
Tax Advantage
Interest income from FD and most post office small savings schemes are taxed as per the income tax rate of the investor. SWP from equity / equity oriented mutual funds are subject to capital gains taxation. Withdrawals made within 1 year of investment are subject to short term capital gains tax @15%. Capital gains arising out of withdrawals made after 1 year of investment are tax free up to Rs 1 lakh of capital gains per year. Long term capital gains in excess of Rs 1 lakh are taxed at 10%. The beneficial tax treatment makes SWP one of the ideal long term income solutions.
Conclusion
SWP is a smart and convenient option for getting predictable cash-flows from your investment; at the same time, there are multiple considerations that you need to be aware of, to get the desired results from your SWP. If you need regular income from your investments, you should discuss Systematic Withdrawal Plan or SWP option with your financial advisor.
In Systematic Withdrawal Plan (SWP), you can draw a fixed amount from your mutual fund investment at a specified frequency (monthly, quarterly, annual etc); you can specify the day of the month when the withdrawal should be made and the amount will be credited directly to your bank account on the specified day. You can continue your SWP as long as there are balance units in your mutual fund scheme account.
Over the last 4 – 5 years with growing popularity of mutual funds among retail investors, dividend paying schemes have attracted a lot of investor interest. Several mutual schemes have maintained good monthly dividend pay-out track records over the last few years and are seen as good investment options for regular income. However, investors should know that mutual fund dividends are paid at the discretion of the fund house and are not guaranteed unlike FD monthly interest.
Investors should understand that as per SEBI regulations, dividends can paid only from the accumulated profits of a scheme. In a prolonged market downturn, schemes which continue to pay regular dividends, may deplete their reserve of accumulated profits and may not be able to declare dividends until conditions improve.
Systematic Withdrawal Plans is a smart investment option for investors who need regular income from their investments because of the following reasons -
- It gives fixed cash-flows to investors till the time they have sufficient unit balance. Unlike mutual fund dividends, you can decide how much cash-flow you want to receive.
- For reasonably low rates of withdrawals, you can get both regular cash-flows as well as capital appreciation. Mutual fund returns in the long term are usually much higher than traditional savings products.
- Systematic Withdrawal Plans is one of the most tax efficient income solutions for investors.
Systematic Withdrawal Plan generates cash-flows (income) for investors by redeeming units of mutual fund scheme at specified intervals. The number of units redeemed to generate cash-flows in an SWP depends on the SWP amount and the scheme Net Asset Values (NAV) on the withdrawal dates. In an SWP, your unit balance will diminish over time, but if the NAV grows at a faster rate than your withdrawal rate in the long term, then your investment value will be higher resulting in capital appreciation, intermittent volatility not with standing.
Tax Advantage
Interest income from FD and most post office small savings schemes are taxed as per the income tax rate of the investor. SWP from equity / equity oriented mutual funds are subject to capital gains taxation. Withdrawals made within 1 year of investment are subject to short term capital gains tax @15%. Capital gains arising out of withdrawals made after 1 year of investment are tax free up to Rs 1 lakh of capital gains per year. Long term capital gains in excess of Rs 1 lakh are taxed at 10%. The beneficial tax treatment makes SWP one of the ideal long term income solutions.
Conclusion
SWP is a smart and convenient option for getting predictable cash-flows from your investment; at the same time, there are multiple considerations that you need to be aware of, to get the desired results from your SWP. If you need regular income from your investments, you should discuss Systematic Withdrawal Plan or SWP option with your financial advisor.