Hello Readers!
Mutual fund investment has been the most popular investment choice among a large group of investors, reasons are many like it gives good liquidity, good growth to investments, a wide range of schemes to invest, and dividend option to get regular incomes from investment!
Yes, the Dividend option offered by mutual funds, made its investors rely on it for regular income for a long time. This option was most favored as it was tax-free in the hands of investors. However, after the Union Budget 2020 was announced trend turn down, as it was mentioned in the budget that “Dividend income from mutual funds is now taxable at the rate of your income tax”.
Now opting for a dividend option in mutual funds is no more a beneficial factor for investors especially for those who are in the high tax bracket, so what is the alternative then?
SWP is a Systematic Withdrawal Plan! This can be the best alternative for those who invest in mutual funds to receive a regular income. SWP allows you to withdraw defined amounts in regular frequency. SIP allows defining your investment amount, in a similar way through SWP you can define your withdrawal amount as per your convenience.
Well, well, there are still some facts related to SWP, are unknown to you that you must know before you jump on this facility offered by mutual funds!!
Let us know about SWP in details-
First Accumulate Corpus Then Select SWP!
Well, in order to withdraw a certain amount on regular basis, you need to first accumulate a good amount in your mutual fund investment. Suppose if you invest in a mutual fund scheme today and opt for SWP from that scheme the very next month. Here you will end up withdrawing your capital only. This is because you didn’t give a good time for your investment to grow.
It is suggested, start an SWP from an investment made 10 years ago. Because you know that your investment started 10 years ago has a good accumulated gain, that you can use as your regular income from your investment.
Be Careful to Taxation Trend!
Like every SIP installment is taken as a fresh purchase, each SWP amount is taken as a fresh or say separate redemption, and thus the tax treatment is also different. For example, any capital gains in an SWP started in a debt fund after two years of investment, will be treated as short term capital gains. However, if the SWP continues for more than a year and goes beyond the third year, any gains will be treated as long term capital gains.
So, before you opt SWP plan be aware of the capital gains tax status for each withdrawal.
Ideal SWP Amount!
Well, the ideal SWP amount is completely subjected to how much regular income do you expect from your investment. However, if you take the advice of an expert then, then it is suggested ideally do not exceed your redemption than what the yield of your investment is. If you start withdrawing monthly amounts in excess of what you can potentially earn in the scheme, your corpus will start to decline at a faster pace than it is growing.
Estimate what the annual average return or yield of the fund is likely to be, break that up into 12 equal parts, and set your monthly SWP around 20% less than that figure. It could be 10% less or 30% less too, depending on your specific requirements.
SWP facility is a good alternative for those who are looking to invest in mutual funds for a regular income but can’t go with the Dividend option. However, it is advised to be mindful of the factors before you opt for SWP so that you experience its benefits and not end up harming your investments.
For any kind of query regarding financial planning you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).