Systematic Withdrawal Plan

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Gyanendra Mishra retired from government service and he now wants to invest his retirement benefits. He wants to earn regular income from his investments. To know more on how to meet this objective he contacts SHYAM a financial advisor.

Mishra: I would like to invest in schemes/mutual funds that give me regular monthly income from my investments. Should I opt for fixed income instruments like Senior Citizens Savings Schemes (SCSS), Post Office Monthly Income Scheme, Bank FDs, Monthly Dividend Option or Systematic Withdrawal Plan?

Shyam: For making the optimum use of your retirement proceeds, instead of putting the entire corpus in any one of the fixed income instruments, you can invest in a few schemes. Remember the fundamental rule of investing: “don’t put all your eggs in one basket.” You can certainly invest a part of your funds in SCSS. In the last union budget interest income up to Rs 50000 has been exempted from income tax for senior citizens. Therefore even FDs are good. There are some good quality small banks that are offering attractive rates of interest. So depositing some money in FDs which yield interest up to Rs 50000 a year would be a good idea.

An important instrument which has not yet attracted the attention of investors is Systematic Withdrawal Plan (SWP). SWP is a plan that allows the investor to withdraw a part of his investment at a pre-set date every month or quarter or any time period as per his requirement.

Monthly dividend options on debt funds including MIPs are less lucrative because, the fund has to pay 28% dividend distribution tax on dividends and this tax burden will reduce the dividend income distributed to the investors.

Mishra: Please tell me more about SWP?

SHYAM: Under SWP, your lump sum is invested in a fund (equity or debt or hybrid) and money is withdrawn from this fund at periodic intervals. It can ensure a fixed amount coming to your bank account, on a predetermined date just like salary income. For example, you can invest a lump sum in a mutual fund and give an SWP instruction to credit a particular amount say Rs.10000/- or Rs 15000 every month to your bank account. This amount that you withdraw can be a fixed amount or a variable amount.

SWP instruction given can be stopped / changed anytime. If you feel your expenses have increased, you may increase the SWP amount. So, there is complete flexibility in this strategy.

For retirees with lower risk appetite, investments in debt oriented funds would be more appropriate. For those with higher risk appetite, there are equity funds and aggressive hybrid funds (former balanced funds) which also give you an option to withdraw money systematically. But since these funds have higher allocation to equities they might turn problematic in a bear market.

Mishra: What are the withdrawal options?

Shyam: SWP has two withdrawal options – withdrawing a fixed amount or withdrawing a variable amount. In the fixed amount withdrawal option you can withdraw a fixed amount at your chosen frequency irrespective of how your investment is performing.

In the variable amount withdrawal option (capital appreciation withdrawal option) you withdraw whatever capital appreciation/profit you have made on your initial investment. Here, only the capital appreciation on investment is withdrawn and credited to your account.

Mishra: What are the tax implications?

Shyam: If you invest in an equity oriented fund or aggressive hybrid fund and opt for SWPs after one year your long-term capital gains beyond Rs 1 lakh will be taxed at 10 %. If you withdraw before one year there will be short-term capital gains tax of 15 %. For debt fund SWPs, if there is any short term capital gain ( gains accruing within 3 years) at redemption, that will be added to your total income and taxed as per your tax slab. Your long-term capital gains (gains after holding for 3 years) will be taxed @ 20% with inflation-indexation benefit. This is a clear advantage compared to interest on FDs where there are no indexation benefits. However short-term capital gains will be clubbed with your income and taxed at the appropriate tax slab.

Mishra: Do you think SWP is a good option I can suggest to my son who is a professional?

Shyam: Well, he can opt for SWP if he is looking for regular flow of money. He may select a good debt fund and opt for SWP option for regular monthly income. But if he doesn’t need regular income, he may opt for SIPs in an equity fund or balanced fund.

SWP helps you create a steady flow of income, without having to liquidate all of your investment. Only partial redemption is made for each withdrawal allowing you to keep rest of the investment intact.

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