SWP is a feature offered by an open-end mutual fund scheme, where an investor can withdraw a fixed amount of money every month. Typically, on the date which is pre-decided, units from your scheme are sold and the amount is transferred to your bank account. The balance units in the scheme keep growing in line with the markets. Many retired individuals and senior citizens use this money to get a regular income and meet monthly expenses.
WHAT ARE THE BENEFITS OF SWPs? HOW ARE THEY BETTER THAN THE DIVIDEND OPTION IN A FUND?
To start with, an SWP is considered a far more reliable tool for monthly cash flows than a dividend. In the dividend plan of an equity fund, the quantum and frequency of dividend as well as date of dividend are not guaranteed, and it depends on market movements and the profits that are available in the scheme. SWPs are better than mutual fund dividends for regular income as they bring stability of income.
WHY ARE SWPS CONSIDERED TAX-EFFICIENT?
SWP is redemption of units from the scheme typically which are equity-oriented for taxation purposes. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity-oriented funds. For units held for more than a year, long- term capital gains of 10% will be applicable, while for units held for less than a year it is 15%. In addition, long-term capital gains of up to 1 lakh in equity-orient- ed funds in a financial year are tax free. In comparison, when you opt for a dividend payout in a mutual fund scheme, there is tax on the dividend paid in line with your tax slab, which could go up to 30% for those in high tax brackets. If the dividend amount exceeds ₹5,000 in a year, the fund house deducts 10% TDS, which reduces your cash flows.
WHAT ARE THE OPERATIONAL ASPECTS TО BЕ KЕРТ IN MIND BEFORE YOU START AN SWP?
Investors generally use the growth option of a large-cap. flexi-cap, multi-cap, and the index fund of an equity-oriented hybrid scheme to start an SWP. They should avoid thematic sectoral funds and small, mid-cap schemes. SWP can be started while investing or even later. If you already have a mutual fund scheme, you can activate the SWP option in the scheme. To activate it, you need to simply fill out an instruction slip with the AMC stating the folio number, the withdrawal frequency, date for the first withdrawal, and the bank account to credit the proceeds.
Disclaimer: – Mutual funds investments are subject to market risk. Please read the offer documents carefully before investing
