Investments in mutual funds (MFs) are made from the perspective of meeting a set of financial goals. As these goal near, there is a possibility of final returns being affected due to various factors that may include stock market volatility, interest rate changes etc. To counter any negative impact on capital gains, investors normally opt for a Systematic Withdrawal Plan (SWP).
While Systematic Investment Plan (SIP) requires a fixed amount or units to be made into the selected scheme for accumulation, SWP works in the reverse – withdrawing fixed amount or units from the accumulated investment.
Investors can opt to withdraw investments either weekly, monthly, quarterly, half-yearly or even annually, thus creating regular cash-flow for needs. There is no limit as to when
investors can start an SWP. They can choose to opt for SWP even while making investments.
According to Gopal Kavalireddi, Head of research, FYERS -- a discount broker -- SWP can be used by investors whose financial goals are near, as well as by senior citizens and retirees desiring a source of monthly income.
"With this tax-efficient mechanism, a fixed amount or fixed number of units or just the capital gains can be withdrawn, till the end of a select drawing period or accumulated investment, whichever comes earlier," he explains.
The larger benefit of SWP, as Kavalireddi adds, is that, as a portion is withdrawn as monthly income, the balance amount in the fund continues to remain invested, to take advantage of further gains, if any, based on market conditions.
"While the flexibility to increase or decrease monthly payouts exists, a consistent and smaller amount would ensure the longevity of corpus, and thereby periodic payments," Kavalireddi elaborates.
Taxation will be applicable on SWP as per the standard norms for equity and debt mutual funds.
If the SWP is initiated before 12 months for an equity fund, it attracts short-term capital gains at the rate of 15 percent plus 4 percent cess. Long term capital gains for equity funds, on the other hand, are taxed at 10 percent plus 4 percent cess provided the gains are over Rs 1 lakh.
For debt-oriented schemes, if the holding period is less than 36 months, gains are taxed as short term capital gains and as per the investor's tax slab while if the holding period is more than 36 months, then long term capital gains of 20 percent with the benefit of indexation are applicable.
While opting for SWP, investors should also check the exit load as some schemes may attract exit-load if the investments are withdrawn before one year.
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