Financial planners believe investors can set up systematic withdrawal plans (SWP) from their mutual fund scheme to get a monthly cash flow. This is one of the most tax-efficient ways to meet monthly cash flows and investors could use equity funds, hybrid funds or a mix of the two to meet their needs.
What is a systematic withdrawal plan in MFs?
SWP is a feature offered by an open-end mutual fund scheme, where an investor can withdraw a fixed amount of money every month. Typically, on the date which is pre-decided, units from your scheme are sold and the amount is transferred to your bank account. The balance units in the scheme keep growing in line with the markets. Many retired individuals and senior citizens use this money to get a regular income and meet monthly expenses.
What are their benefits?
To start with, an SWP is considered a more reliable tool for monthly cash flows than a dividend. In the dividend plan of an equity fund, the quantum and frequency of dividend as well as date of dividend are not guaranteed, and it depends on market movements and the profits that are available in the scheme. SWPs are better than mutual fund dividends for regular income as they bring stability of income.
Why are SWPs considered tax efficient?
SWP is redemption of units from the scheme — typically which are equity-oriented for taxation purposes. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity-oriented funds. For units held for more than a year, longterm capital gains of 10% will be applicable, while for units held for less than a year it is 15%. In addition, long-term capital gains of up to 1 lakh in equityoriented funds in a financial year are tax free. In comparison, when you opt for a dividend payout in a mutual fund scheme, there is tax on the dividend paid in line with your tax slab, which could go up to 30% for those in high tax brackets. If the dividend amount exceeds 5,000 in a year, the fund house deducts 10% TDS, which reduces your cash flows.
What is a systematic withdrawal plan in MFs?
SWP is a feature offered by an open-end mutual fund scheme, where an investor can withdraw a fixed amount of money every month. Typically, on the date which is pre-decided, units from your scheme are sold and the amount is transferred to your bank account. The balance units in the scheme keep growing in line with the markets. Many retired individuals and senior citizens use this money to get a regular income and meet monthly expenses.
What are their benefits?
To start with, an SWP is considered a more reliable tool for monthly cash flows than a dividend. In the dividend plan of an equity fund, the quantum and frequency of dividend as well as date of dividend are not guaranteed, and it depends on market movements and the profits that are available in the scheme. SWPs are better than mutual fund dividends for regular income as they bring stability of income.
Why are SWPs considered tax efficient?
SWP is redemption of units from the scheme — typically which are equity-oriented for taxation purposes. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity-oriented funds. For units held for more than a year, longterm capital gains of 10% will be applicable, while for units held for less than a year it is 15%. In addition, long-term capital gains of up to 1 lakh in equityoriented funds in a financial year are tax free. In comparison, when you opt for a dividend payout in a mutual fund scheme, there is tax on the dividend paid in line with your tax slab, which could go up to 30% for those in high tax brackets. If the dividend amount exceeds 5,000 in a year, the fund house deducts 10% TDS, which reduces your cash flows.
