Can help meet financial goals without having to time the markets and making poor financial decisions
If you are familiar with investing, it is likely that you have heard of systematic investment plans or SIPs. SIPs have indeed risen in popularity and have become the preferred route of investment for many small investors. But SIPs are not the only benefit that mutual funds offer. Another tool that a retail investor can use to his benefit is the systematic withdrawal plan (SWP). Functionally, a SWP is the direct opposite of a SIP. It is the facility by which an investor can withdraw a certain amount of money from his exiting investments in mutual funds at period intervals (monthly or quarterly).
Fixed withdrawal: If you have your investment in either debt or equity mutual funds, you can withdraw from it systematically through SWP. When you start a SWP, a fixed amount of money is withdrawn every month by liquidating the required number of units based on the NAV of the scheme at the time of withdrawal. For example, you have 1000 units in a MF scheme and its current net asset value (NAV) is Rs 10. You have put in a SWP request of Rs 500. Therefore, in the current month, 50 units will be redeemed to meet your SWP request.
Tax advantage: Since there is no TDS on capital gains and all investments in mutual funds fall in this category, it becomes a very investor friendly tool. Further on equity investments kept for more than a year, the tax liability is Nil and only short term capital gains tax of 15% is applicable on withdrawals from equity investments within one year. Tax is applicable on debt funds (according to the tax bracket of the investor) if they are held for less than 36 months. Those who fall in a higher income tax bracket, a SWP can be far more tax efficient than a traditional investment option. This is also because in SWP, the tax is paid only on the gains made due to the NAV movement and not on the principal part in the withdrawals making the overall tax incidence lesser. In the case of a traditional investment option, the entire gain is taxed according to the investors tax bracket (the highest currently being 30 %).
Regular supplemental income: A SWP can provide a steady source of income for those who need money when their cash flow comes to a halt like retirement, or at a time when supplemental income becomes a necessity due to altered circumstances in life.
Can meet financial goals: If planned well ahead of time, SWPs can provide a steady flow of money when most needed. They can therefore be linked to long term financial goals, such as providing a steady income in one’s retirement years.
Who can use SWPs?
SWPs may turn out to be the most useful for retirees or those approaching their retirement years. If you are an investor who has invested steadily in mutual funds for the long term (10-15 years) you can enjoy the fruits of capital appreciation along with systematic tax efficient withdrawals in your retirement years and lead a dignified and comfortable life.
Since SWPs in most cases provide a fixed amount you can enjoy the benefits of a steady stream of income without having to dilute your investments or redeem your units all at once.
However, the use of SWPs may not be restricted to retirees alone. You can set up an SWP from your existing mutual fund corpus at any age, and provide a steady stream of income for your aging parents, dependent spouse or kids. However, your initial investments and the appreciated amount must be robust enough to support a SWP for the long term.
Mutual funds are designed keeping in mind the needs, interests and financial goals of a small investor. By using tools like SIP and SWP judiciously, you can meet your financial goals without having to go through the hassle of timing the markets and making wrong financial decisions that may cost you dearly and throw you off track.
WHY GO FOR SYSTEMATIC WITHDRAWAL PLAN?
- Can help meet financial goals without having to time the markets and making poor financial decisions
- Is an investor-friendly tool as there is no tax deducted at source on capital gains
- Also helps your income during times like retirement
- Can be far more tax efficient than a traditional investment option and beneficial for people with higher tax bracket
The writer executive director and CMO, SBI Mutual Fund
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