Systematic Withdrawal Plans

 Greetings,

We hope you found our previous post on ESG funds both useful and informative. If you haven’t had a chance to read it yet, we’ve put it here so you don’t miss out!


A steady cash flow is the most important aspect of any retirement plan, and a lot of people look to Mutual Funds to either create or supplement a regular income. While a number of schemes exist that provide monthly or quarterly dividends, these are completely dependant on profits and hence cannot be classified as guaranteed returns. This is where SWPs or systematic withdrawal plans step into the picture and provide investors with a tax-efficient way to maintain a guaranteed cash flow while also outperforming a fixed deposit. 


Disciplined withdrawals

A lot of people talk about discipline while investing, but not many about discipline while withdrawal which is an equally important aspect of maintaining a steady cash flow post-retirement. An SWP helps maintain discipline during withdrawal by redeeming a fixed amount of mutual funds every month, irrespective of the state of the market. This effectively does two things, it protects you from selling lump sums when the market is down, as well as overinvesting when the market is on a high, both of which are counterproductive if your aim is to create or supplement a steady income. 


Now unlike a fixed deposit where you only withdraw the interest and your corpus remains intact, with an SWP, you’re actually withdrawing both, a part of your capital, and the interest. So say for instance you invest one lakh rupees to buy 10,000 units of a fund (NAV 10) and want a 5,000 INR monthly withdrawal. What will happen here is every month, 5,000 INR worth of units, based on the “Rupee-cost-average,” will be sold every month to supplement your income, irrespective of the state of the market. 

Tax efficiency

This benefits investors in a number of ways, as opposed to a lump sum withdrawal which is subject to a single NAV at any particular point in time, Rupee-cost-averaging gives investors the ability to withdraw their funds at an average NAV that is collected over a longer period of time. This not only supplements your cash flow with fixed monthly returns but also gives your investment a longer period of time to grow and consolidate. Additionally, as opposed to interest earned from a fixed deposit that is classified as income and taxable as such, in an SWP, only the growth or profit is taxable as income.


To further elaborate, If 10,000 units of a fund that you bought for one lakh rupees grown to a value of 1.1 lakh rupees INR, registering a 10% growth, only 10% of your monthly withdrawal is taxable as income. Using the above example where the goal was to create a 5,000 INR monthly cash flow, only 500 INR will be taxable as income. When compared with the interest earned on a fixed deposit that is completely taxable, SWPs make a pretty good argument as a tax-efficient way to create a steady cash flow. To know more about SWPs and which ones are best for your portfolio, age, and risk profile, feel free to contact us.

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