Mr Sharma will be retiring in 2 months from now. At present, he’s got a mutual fund corpus of Rs 2 crore. He’s wondering how to take care of his post-retirement expenditure using his mutual fund investments!
Are you too facing similar kind of dilemma?
Don’t worry, use Systematic Withdrawal Plan (SWP).
SWP is the lesser known among the investors as compared to SIP. SWP is just the opposite of SIP.
In SIP, a fixed percentage is deducted from your bank account and invested in a mutual fund scheme. However, in SWP, a fixed sum is credited in your bank account from your mutual fund scheme periodically.
SWP helps you to earn a regular income from your mutual fund portfolio. Under this, you may schedule withdrawals of a fixed or variable amount from your mutual fund scheme at regular intervals.
You may choose the frequency to be monthly, quarterly, semi-annually or annually as per your requirements.
It depends on you whether you need a specific amount of the corpus or only the capital gains. You can customise your cash flows as you want. In this way, you may earn a regular income while still remaining invested in the scheme.
How a systematic withdrawal plan works
Choosing an SWP has implications on your mutual fund account. SWP isn’t similar to choosing a monthly interest receiving option on a bank fixed deposit or a post office saving scheme.
In case of a bank deposit, the corpus value doesn’t get affected upon withdrawal of interest. But each time a systematic withdrawal is done from the mutual fund scheme, your fund value gets reduced by the said number of units.
Let’s understand this with the help of an illustration.
You hold 10,000 units of a mutual fund scheme. You have instructed your fund house to credit Rs. 5,000 to your bank account every month through SWP.
Consider the NAV of the scheme to be Rs 10 right now. So, withdrawing Rs 5000 from the scheme implies selling 500 units (Rs 5000/Rs 10). After doing a withdrawal, your mutual fund account will have 7500 units (8000-500).
If in the beginning of the next month, the NAV of your scheme is Rs 20. Then, withdrawal of Rs 5000 amounts to selling 250 units (Rs 5000/Rs 20). Your mutual fund account will be left with 7250 units (7500-250).
In this way, the number of units keep declining with each withdrawal. An increase in the NAV would require redemption of lesser units and vice-versa.
Unplanned SWPs can have detrimental effects on your fund value. Thus, while opting for an SWP, be sure about your investment decision.
How systematic withdrawal plans are taxed
One thing to remember is that SWP is treated as a redemption and will be subject to tax. If the holding period is less than 36 months, then the amount withdrawn will form part of your income and taxed according to your income slab.
If the holding period is more than 36 months, then the amount withdrawn will be subject to long-term capital gains tax of 10% (without indexation) and 20% (with indexation) .
Since an SWP can be done in an open-end fund, the other flexibilities also remain with the investor. The investor can redeem the entire invested amount any time or can stop or modify the SWP amount as well. An SWP can be done in all kinds of debt funds as well as equity funds. An investor can choose a fund that fits his or her risk profile.