In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.
– Peter Lynch
SWP (Systematic Withdrawal Plan)
The third important tool that I use for my clients, towards their path to the richness, is called SWP.
SWP refers to a Systematic Withdrawal Plan which allows an investor to withdraw a fixed or variable amount from his mutual fund scheme.
There are options to withdraw on a pre-set date which could be monthly/quarterly/half-yearly or annually as per the client’s needs.
Instead of investing in mutual funds and withdrawing through dividend option, this method is much better and tax optimized.
How does a Systematic Withdrawal Plan work?
When you invest a lump sum amount in a mutual fund, you can choose a Systematic Withdrawal Plan. Thereon, it affects your mutual fund account. An SWP is not the same as opening a fixed deposit account in a bank where you receive monthly interests. In a fixed deposit, the corpus value does not get impacted when you withdraw the interest. However, in a systematic withdrawal plan in mutual fund schemes, the value of your fund is reduced by the number of units you withdraw.
In India, investors use SWP primarily for two significant reasons:
- To meet regular monthly expenses post-retirement.
- For tax
The benefits of SWPs are:
- It is considered to be an ideal post-retirement income. It is suitable when a person who doesn’t have a regular income and when the retired person is wholly dependent on his or her Moreover, an SWP amount can be altered anytime.
- It is an excellent tool for liquidity anytime!
- It is a wise investment It is referred to as redemptions. It is not subject to tax deductions at source. The capital gains though are taxed on the withdrawn amount. You may also opt for setting up your withdrawal in such a manner that you only withdraw the appreciation gained on the investment amount. Strategic investment keeps your capital invested, while at the same time, you enjoy the gains at a regular interval.
- The withdrawal options- You can have a fixed withdrawal This option gives you access to a specified amount from your investment. It can be on a monthly or quarterly basis.
- Surprisingly, the changes in the tax rules have actually boosted the efficacy of Mutual You can withdraw units from your own fund and partially some units from your appreciated fund value. Both these lead to minimized tax implications.
- It is better than the dividend option: The Dividend pay- out frequency and pay-out of the dividend-paying monthly income plans are not certain or fixed At times, the fund cannot generate sufficient profits, and you will not get any dividends. Thus, every month, you will have different amounts coming in. Also, during some months, there might be no money received. SWP is, therefore, an excellent option for post-retirement or similar needs.
- Taxation: The investor has to pay Long-term or short-term capital gain- on the sale of his investment; this would prove to be a better option than paying for the dividend distribution tax (DDT) of 5%. Furthermore, it would be prudent to have Mutual Fund SWP from equity funds. In the latter case, your long-term capital gains from equity mutual funds are exempt if you can hold for more than a year(subject to capital gains laws). Thus, you pay a minimum tax on the withdrawals. (Updated till December 2019, please check the latest regulations)
- Inflation Protection: While investing in equity mutual funds or even debt, using SWP helps in fetching you the This strategy beats inflation, especially if one opts for the equity fund route.
Overall, using the SWP tool strategically can help you in many ways.
It is advisable to take the expert opinion of a qualified professional. He or she can best guide you which one to opt and how to take benefit.
All the best for a great investment in equity and debt mutual funds and use these tools to move positively towards your richness path.
Taressh Bhatia is a CFPCM CERTIFIED FINANCIAL PLANNER CM and is the founder/partner of Advantage Financial Planner LLP – A firm Registered with SEBI (Securities and Exchange Board of India) as RIA (Registered Investment Advisor).
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