Systematic Withdrawal Plan – A good alterative to meet regular pay out needs

Financial planning is not only about saving and investing. In fact, ensuring cash flow to meet planned expenses is avital component of financial planning. On this account, mutual funds with dividend option have been one of the preferred go-to investment vehicles. But, Union Budget 2020-21 has put a spanner to dividend disbursements, especially for investors in the higher tax bracket.
At the outset, repeal of the dividend distribution tax (DDT) in the budget on dividends paid by companies and mutual fund houses and moving the tax liability of the dividend amount to the investor has resulted in more money in the hands of the investor. The devil, though, is in the fine print - the tax incidence for investors, especially in the higher tax bracket, has effectively increased.
Against this backdrop, Systematic Withdrawal Plans (SWPs) offered by mutual funds can be a prudent alternative for investors looking to generate cash flow from their investments at a regular frequency. Not only is the investor able to quantify the cash flow and frequency, but the plan can also aid in reducing the tax liability for the investor

In this article, we delve deep into how SWP can be more beneficial than the dividend option.

Benefits of SWP:

SWP enables investors to redeem/withdraw money from a mutual fund scheme at pre-determined intervals (monthly, quarterly, half-yearly, or yearly). Based on the investor’s instruction, an equivalent amount is deducted by the fund house. The investor can start an SWP by giving instructions to the asset management company and providing relevant details, such as folio number, scheme name, withdrawal amount, timing, and bank account in which the amount is to be credited.

SWP can, therefore, help investors design a more customised investment strategy and ensure cash flow from their investments at regular frequencies. Investors, however, should take a note of the following before opting for an SWP:

  • Build a healthy investment corpus to facilitate adequate cash flow from SWPs
  • If possible, consider withdrawing smaller amounts via SWP so that the amount that is deducted is largely that of capital appreciation,ensuring that the capital invested stays intact
  • Evaluate the tax incidence and exit loads of schemes before settling for the SWP
  • Mutual funds are market-linked. Fluctuations in the underlying market can impact the investment corpus

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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