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Saturday, 5 January 2019

SWP (Systematic Withdrawal Plan): Monthly Income From Mutual Funds



As we know that every investment must have goal associated. An investor can have a goal to get regular income from own investment like pension or salary. We have MIS in post office to server this. Mutual fund investors can also get this type income. Mostly individuals go for dividend options. But dividends  attracts the dividend distribution tax (10%). So there is cost involved in this. Mutual funds have other way to give regular income called SWP(systemic withdrawal process). In SWP investor invest a large amount in one go and redeem some fix amount every months. Your rate of withdrawal should be in line with the expected rate of return of the fund.


For example if your funds gives average 9% per year then it is safe to withdraw .7% per month. If we withdraw say 1% per month then after one year we would have only 97% of our initial investment. That means if you want to sustain your SWP over long periods of time and also grow your wealth, your withdrawal rate should be lower than long term (covering different market cycles) average asset returns. In our view your withdrawal rate from your SWP should not exceed 8% per annum to start with.

Now take a hypothetical example purely for the purpose of demonstrating . Let us assume that you  have Rs 10 Lakhs. You have invested the fund in a fund with average return of 8% per year and decided to withdraw Rs. 6500. Then at the end of 5 years you would left with Rs.1012246. But if you withdraw 7000 per month then you would have only 975507 at the end of 5 years. So withdrawal rate should be lower than long term return.

But if you thinking for long term then we should also take inflation into our calculation. That means we need to increase our withdrawal amount to meet our requirement. Now in same example  if we take 7% inflation then we can start our withdrawal as Rs. 5500 which will increased by 6% annually. At the end of 5 years our withdrawals reach to Rs. 6943 per month and we would left with 1038439.

Taxation with SWP is same as normal mutual fund investment. Like SWP withdrawals from an equity fund, after one year from the date of investment, is subject to long term capital gains taxation. Long term capital gain of up to Rs 1 Lakh in a financial year is tax exempt. Long term capital gains in excess of Rs 1 Lakh are taxed at 10%.

Now what types of fund we should choose? In my opinion we should choose fund with stable return. If you can take slight risk on your capital then you can go with conservative hybrid fund with 10 to 20% of equity exposure. These types of fund can give 9-9.5% annual return. If one can not take the risk on capital then you should go with liquid fund or ultra-short term fund. It also better to go with 3 to 4 fund to mitigate the risk.


Hope this help.

You can download the sample file form here.

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