nvestors park their funds according to their needs and there is no tailor-made layout to do so. One can invest and withdraw as per one’s own financial needs. Some want a systematic investment and a few also need a systematic withdrawal.
A Systematic Withdrawal Plan or SWP allows an investor to withdraw from his/her mutual fund scheme every month on an already set date. The amount and frequency of withdrawal can be set by the individual and accordingly the units from the portfolio are sold and funds get credited to the account of the investor. It is just opposite of a Systematic investment Plan.
The need to have a Systematic Withdrawal Plan-
- By fixing a time to withdraw regularly from the fund, the adverse effects of market fluctuations can be avoided. This helps in avoiding large amount of funds being taken out of the portfolio due to panic.
- To receive the funds at the right time as per the financial needs serves the purpose of the investment goals for many.
- Other than a fixed income like salary, this creates a flow of income to meet other needs. It helps in evading cash crunch. It could work as a pension whether a pension plan is there or not for the person concerned.
- Arbitrage funds offer zero-risk with the dividend option for risk-averse investors. The dividend can be invested in a debt fund using an SIP.
- When the gains are pulled out during the bullish trends, more gains are expected. When the annual withdrawal is lesser than the returns generated by the scheme, the investments have a longer life than in a bear market.
How does it work?
In the case of a fixed deposit the interest amount is separate from the principal and when we withdraw the interest the principal does not get affected. But it is important to note that whenever a withdrawal is made in case of a mutual fund, the value of investment is reduced by the number of units that get withdrawn.
Options to Withdraw-
A specified amount can be withdrawn from investment on either a monthly or a quarterly basis with the fixed withdrawal option.
With the appreciation withdrawal option, the appreciated amount gets withdrawn on a monthly or quarterly basis.
Tax implications
- The redemptions thus made are not subject to TDS.
- Withdrawal of debt funds which are held for less than 36 months shall be taxed as per the applicable income slab of the individual. But when they are held for more than 36 months, the long-term capital gains at 20% with indexation are applicable.
- In a case where equity funds are held for less than a year, the withdrawn amount is taxable at 15%. But when they are held for more than a year, they are taxed at 10% long-term capital gains without indexation.
Rupee Cost Averaging
Markets keep on fluctuating. When markets are high it is better to redeem units of mutual funds to gain profits. Bearish markets result in losses. When purchase and sale are done in instalments, the benefit earned is called Rupee Cost Averaging.
Markets could be high or low at the time when systematic withdrawal is made. An SWP with fixed amount shall result into redemption of lesser units as compared to the time when markets are low. This helps in averaging out the returns.
For all the investors, them being experienced or not, SWP could be of great help to attains the set financial goals.
Bhoi Smrutirekha Dharanidhar