Let us learn about SWP as a tool of earning regular income.
What is Systematic Withdrawal Plan?
Systematic Withdrawal Plan (SWP) is a service offered by mutual funds which provides investors with a specific amount of payout at a pre-determined time intervals, like monthly, quarterly, half-yearly or annually.
HOW DOES SWP WORK FOR AN INVESTMENT IN A HYBRID DEBT MUTUAL FUND (GROWTH OPTION)?
Analysis of the table:
- Here, the Investor is investing a sum of 1 Crore as lump sum in the first month and gets 9,46,907 units.
- The investor gives a standing instruction that Rs.60,000 should be received by him on monthly basis, and thus units worth Rs.60,000 as on the said date would be sold off.
- The amount drawn annually was Rs.7,20,000, i.e. 7.2% of the total investment and yet the principal value increases due to growth in market rate of the NAV.
- Thus the total gains on investment are approximately around 10-12% considering the growth of NAV of the Equity Fund.
- The total Tax charged throughout the year was Rs. 6,457 on withdrawals of Rs.7,20,000, i.e. around 0.90% of the withdrawn amount.
Now, one might argue that similar gains could have been accomplished in a fixed deposit, with Interest being withdrawn on monthly basis. However, gains are calculated differently when it comes to Interest income from FD and redemption of units of Mutual Funds.
Let us try to understand the difference between interest and redemption, after taking the following assumptions into consideration:
- The comparatives are Debt based mutual fund, which are considered as fixed income generating option and thus almost Safe as a Fixed Deposit.
- The rate of return on fixed deposit is taken as 7.5%, which is as per current market rate of return, whereas for Debt fund, the rate of return is taken as 8% based on the historic Rate of return of Debt based funds.
- Assuming the investment in Debt fund is short term, the capital gains are taxed at the Income Tax slab of the Assessee.
The table below shows the tax impact of an SWP and FD, when the fund so taken is a Debt based and the Tax slabs are taken as 10%, 20% and 30% so as to have the clear picture:
- Looking at the table, we can clearly see how tax implications are different when investment is made in an SWP rather than Fixed Deposit.
- Comparing the above two tables, there are gains of Rs.1,89,265, Rs.2,53,531, Rs.3,17,796 more than Fixed Deposit in respective Tax slabs.
- Thus, an SWP in a good scheme is always preferable than a Fixed Deposit.
HOW CAN RICHVIK HELP YOU?
We at RichVik, provide a platform for those who wish to invest into Mutual Funds but are not very comfortable with the quantum of risk that markets entail. Systematic Withdrawal Plan is one of the best methods to have a safe and assured regular income, especially after Retirement.
Through this article, we wish to share the benefits of such a lucrative investment with our clients & also provide a platform for them to invest in such investment opportunities.
To know more about SWP or to start investing, please feel free to contact us at RichVik:
Our Contact details are:
Phone: 022-25674106 / 022-25644106
Email ID: email@example.com