WHAT IS A SYSTEMATIC RETIREMENT PLAN (SWP)?
SWP is a tool offered by a mutual fund house, where an investor can withdraw a fixed amount of money at regular intervals, usually every month. Retirees, senior citizens or anyone who wants a regular stream of income are using this avenue to manage cash flows. Once an SWP is set up for an amount and date of your choice, units in your plan for the relevant amount are redeemed on that day and the proceeds are credited to your bank account. The remaining units in the plan keep moving in line with the markets.
WHAT ARE THE BENEFITS?
SWP is a reliable tool for monthly cash flows and works better than a dividend. In an equity fund’s dividend plan, there is no guarantee about the amount, frequency and timing of the dividend. It depends on the market movements and the profits available in the distribution plan. SWP works better than depending on mutual fund dividends for regular income as it brings stability.
HOW DO SWPS SCORE IN TERMS OF TAX EFFICIENCY?
SWP is the redemption of plan units, usually equity-oriented, for tax purposes. The tax treatment of each withdrawal will be the same as that applicable to equity-oriented funds. Units held for more than a year are subject to long-term capital gains tax at 12.5%, while units held for less than a year are subject to short-term capital gains tax at 20%. Also, long-term capital gains up to ₹1.25 lakh in equity-oriented funds in a financial year are exempt from tax. In comparison, when you opt for a dividend payout in a mutual fund scheme, there is a tax on the dividend received according to your tax bracket, which could be as high as 30% for those in high tax brackets. If the dividend amount exceeds ₹5000 in a year, the fund house deducts 10%. TDSwhich reduces their cash flows.
WHAT ARE THE BEST FUND CATEGORIES TO START SWPS?
Investors should use categories like large-cap funds, flexible funds, index funds, equity-oriented hybrid funds, balanced advantage funds or equity savings funds to start a SWP. They should not use sectoral, thematic or small-cap funds. Keep an annual target of 5-6% of the capital to hold it for a longer period. There is no compulsion to start a SWP immediately after retirement. Allow your capital to grow and do it only when you need cash. The SWP amount can be modified or changed as per your requirement by giving an instruction to the fund manager.
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