Investors parking their funds in mutual funds often look for investment options from where they may seek regular income. This explains why many of them, especially those planning their retirement, opt for systematic withdrawal plans (SWPs) that allow them to take out money from the existing funds at predetermined levels.
Most investors are used to investing through systematic investment plans (SIPs). However, SWPs work differently from SIP investments. In the latter, a fixed amount is transferred from investors’ bank accounts to their mutual fund investments regularly, whereas the transaction flow is reversed in the former.
These plans help investors generate a steady stream of income from their investments and are best suited to those looking for regular cash flows either to meet their expenses or to reinvest the money received. Existing investors seeking periodic income typically use SWP to fund their retirement expenses.
This way, investors have control over the amount and frequency of withdrawals. They can also choose to withdraw only the profits while keeping their invested capital intact. On the specified date, units from the portfolio are sold, and the proceeds are transferred to the investors’ savings accounts.
Why opt for SWPs?
One may question the idea behind opting to invest in SWPs. However, investors looking to extract the dividend option of the scheme benefit the most as the fund house distributes the dividends though it may also charge Dividend Distribution Tax (DDT) at the source.
The tax rate charged on the dividend income is 10 per cent. This relieves the investors from paying taxes again on the dividend income received and credited to their accounts. However, capital gains tax will be levied depending on the type of scheme and the amount withdrawn.
Apart, investors regard SWPs as potentially good retirement facilities as it allows them to redeem regular cash flow from their existing investments. While SWP investors withdraw a fixed amount from their existing investments on a regular basis, the remainder of their investment amount remains invested, thus, allowing them to seek high returns simultaneously.
Many asset management companies (AMCs) mention the tenure during which the SWPs would remain effective. However, if no time frame is specified for the same, payments will continue as long as investors have units in their mutual fund holdings.
How avail the best of SWPs?
Since the idea behind putting money in SWPs is to ensure a regular cash flow, investors putting money in lump sums can opt for instant regular withdrawals as soon as they park their earnings in the fund.
Dev Ashish, Founder, Stable Investor said, “If feasible, it is suggested to start SWP in equity funds at least one year after the investment has been made. The reason is that in the case of equity funds, if the holding period is less than one year (short-term), then the withdrawn amount (via SWP) will be taxed at 15 per cent. But if the holding period is more than one year, the gains are taxed at 10 per cent (after the first ₹1 lakh). So, this helps optimize the tax impact on the SWP withdrawals. Even better would be to plan ahead to allow equity funds a few more years (and not just one year) and then start SWP. That way, equity funds have more time to provide capital appreciation which is generally expected from the equity asset class. In the short term, it’s not necessary that one may see capital appreciation only and hence, SWP from equity funds in a falling market can be a double whammy for investors.”
Furthermore, investments made through the SIP mode can be supplemented at any time with the SWP feature. Investors who have been investing through the SIP mode until retirement but do not wish to continue investing further must consider terminating the SIP without completely redeeming their investments. Rather, SWP is the best way to capitalize on the large corpus.
A regular monthly flow will function more like a pension for them, thus, helping them meet their needs for a much longer tenure because the remainder of the corpus continues to remain invested, thereby, aiding in the growth and accumulation of a large-sized corpus.