Many retired individuals are now using SWP in mutual fund schemes as a tool to meet their monthly cash flow requirements.
SWP provides the investor with a regular income and returns on the money that is still invested in the scheme.
It can be used on any open-end MF scheme.
1. What is a Systematic Withdrawal Plan (SWP)?
SWP is a facility using which investors can withdraw a fixed amount of capital appreciation from a mutual fund scheme. The frequency of withdrawal could be monthly or quarterly .
An investor can customise the cash flows as desired; he can either withdraw a fixed amount or just the capital gains on his investments.
2. How does SWP score over the dividend option?
SWP scores on the reliability front. It offers an investor the advantage of withdrawing a fixed amount of money from his or her investment at the same date of every month for a designated tenure period. It works better than relying on MF dividends for regular income. In the dividend plan of an equity fund, the quantum of dividend is not guaranteed & depends on market movements.
3. How important is the taxation aspect in SWP?
Since SWP is a redemption of units from the scheme, the tax treatment of each withdrawal will be the same as is applicable to equity and debt funds.Hence, for units where the period of holding has not crossed 12 months for equity-oriented funds, investors will have to pay a short-term capital gains tax. For debt funds, there will be a tax liability (short-term capital gains on holding for less than 36 months and long-term capital gains on longer holding periods). In addition, investors also need to keep in mind the exit load of the scheme before running SWP on it.
4. How do you start an SWP?
You can start an SWP anytime after you invest in a mutual fund. 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.
5. Any disadvantage of SWP?
Financial planners believe that the only disadvantage of SWP is that there is a probability of it eating into your capital or eroding your capital, which has been accumulated over a period of time
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