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Personal Finance October 12, 2017

Earn a Regular Income Through Systematic Withdrawal Plan

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Systematic Investment Plan (SIP) is a much-talked-about investment tool. Here you commit to investing in a mutual fund scheme at regular intervals, thus benefiting from the current high tide in the stock market even while not burning a big hole in your pocket by placing a huge sum in one go. Retail investors have accepted SIPs as one of their favorite investment choices and the returns in past couple of years have not disappointed them. Contrary to this option of investing at predetermined intervals is another mutual fund investment choice, Systematic Withdrawal Plan (SWP).

And as the nomenclature suggests, it is a near-reversal of SIP, and where you can regularly withdraw a fix portion from your corpus invested in a mutual fund scheme. It is as easy as this – If you invest INR 10 lakh in a mutual fund plan that comes with an SWP option, you can opt for withdrawal of INR 5000 monthly. You will have the opportunity of either taking it out as cash or investing it somewhere else.

An added advantage with SWP is that the returns are tax efficient. In case of traditional investment options, the entire gain is added to the income of the investor and taxed according to his/her tax slab (E.g., if the investor is in highest tax bracket than the tax rate will be 30% on entire gain). However, in SWP, the tax is paid only on the gain made due to the movement in Net Asset Value (NAV) of the fund. Further, the tax rate is also lower. In case of equity mutual funds, the short-term capital gains (withdrawals from equity mutual funds investment within one year) are taxable at the rate of 15%. 

Let us take the case of two people Mr. A and Mr. B, both belonging to the highest tax slab of 30%. Mr. A invests INR 10,00,000 in a mutual fund with SWP, and the SWP amount is kept at INR 5,000 per month (or INR 60,000 per year, i.e., 6% of investment). Mr. B, on the other h and, invests the same amount in a bank FD with 6% interest. 

Also read: Alternatives to fixed deposits in India

Taxation on Mr. A will be as per the below table; 

 

 

Date of SWP

(1)

 

NAV* (INR)

(2)

 

Invested/(SWP) Amount (INR)

(3)

 

Units withdrawn through SWP 2/1

(4)

 

Balance units

 

(5)

 

Cost of Investment (INR)

3*10.1

(6)

 

Profit (INR)

SWP amount (INR 5,000) – 5

(7)

 

Tax on profit (INR)

6*15%* STCG

1/4/17 10.1 10,00,000 99,000 99000
1/5/17 10.4 (5,000) 481 98,519 4858.1 142 21

 *Net Asset Value (NAV) is a fund’s market value per unit. It is calculated by dividing the total value of all the assets in a portfolio, minus all its liabilities. (Source: www.fundsindia.com)

*Surcharge or Income tax exemptions have not been considered here

However, Mr. B will be liable to pay 30% on the entire gain, i.e., INR 60,000 (10,00,000*6%) per annum. 

Another point to note is that if the return on your mutual fund portfoliosurpasses your regular withdrawals, your arrangement can run till infinity. A 14 percent annual return isn’t a fantasy if your mutual fund manager is a wise investor and opts for an optimal mix of equity and debt instruments. In such a scenario, even if you pull out INR 1000 per month from your INR 10 lakh corpus, INR 2000 will remain as a leftover at the end of the year in your overall corpus. This makes SWPs a preferred choice for people with a sizable amount lying idle and when they need a regular stream of incoming money to fund their expenses. 

A retired individual, a working woman planning a few years’ time off for raising her child, a professional thinking of quitting his conventional job and moving ahead with either research or setting up his own enterprise or even a housewife who has until now relied only on bank fixed deposits or savings accounts are the ones for whom Systematic Withdrawal Plan can be the favorite destination to lock funds. It is easy to guess SWPs will be picked only by those investors (retirees and like) who like minimum risk in their portfolio so that regular earnings and expenditures are not hampered by unfavorable market conditions.

But not everything comes with nil downsides. ‘Mutual funds are subject to market risks,’ and the rate of return on your hard-earned investment can fall short of your hopes in the long-run. The present bullish stock market is a sure-shot winning arena, but no one can guarantee how stocks of even blue-chip companies will perform in the long run.SWP strategy is available in most of the Mutual Fund scheme, and it is advisable to choose as per one’s risk appetite.

Also read: Why Mutual Funds, And Which One

This, however, is a case with all investment options, save you invest in a scheme backed by the government forthe long-term fixed rate of interest,such as PM Vaya V andana Yojana for senior citizens with 8 percent assured return and pension payable at the end of each month, quarter, 6-months or year. Nevertheless, many mutual fund scheme operators have given unexpectedly high returns to investors in past years, and this makesa strong pitch in favour of SWPs, especially for those who want a fixed amount in their h ands at regular intervals. 

Also read: Investment Advice for Millennials of India

(The author Aditya Jain is an expert in financial and stock market trading business with a deep knowledge of international stock purchase and equity plan design).

Disclaimer – The views or opinions expressed in the article are the personal opinions of the author and do not in any way reflect the views of Suvipra. Suvipra does not assume any responsibility or liability for the same.

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One response to “Earn a Regular Income Through Systematic Withdrawal Plan”

  1. Siddharth Khaitan says:

    Wonderful tax explanation. Thanks!

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