In a low interest rate regime, it gets difficult to invest in FDs to meet cash flow requirements. This leads 4 many to look for alternative methods. A popular one pitched right now is SWP from MFs. Lets decode the do's & dont's
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By investing in mutual funds, there are 2 ways to generate cashflow,
(1) Dividend
(2) Systematic Withdrawal Plan (SWP) (1/n)
(1) Dividend
(2) Systematic Withdrawal Plan (SWP) (1/n)
(1) Dividend
(a) Unlike dividends in stocks where the company pays out some part of the profits to you as a shareholder, dividends in Mutual Fund is some part paid out either from the gains you have made or withdrawal of capital (2/n)
(a) Unlike dividends in stocks where the company pays out some part of the profits to you as a shareholder, dividends in Mutual Fund is some part paid out either from the gains you have made or withdrawal of capital (2/n)
(b) Every time dividend is paid, NAV comes down by that relevant value. If your funds current NAV is lower than the purchase NAV and it still pays you a dividend, you are essentially reducing your own capital invested by taking the dividend (3/n)
(c) Dividends are taxed at slab rates and hence may not be a great way to receive cashflows by investors in the higher tax brackets. While this is the case with FDs also, most investors still think dividends are tax-free and hence was important to highlight (4/n)
(d) Which is why SEBI changed the name of the dividend option in mutual funds to ‘Pay-out of Income Distribution cum capital withdrawal’ option.
Don’t go for this option. A better way to receive cashflow from mutual funds is Systematic Withdrawal Plan (SWP) (5/n)
Don’t go for this option. A better way to receive cashflow from mutual funds is Systematic Withdrawal Plan (SWP) (5/n)
(2) SWP
(a) In this feature, you tell the scheme (all except ETFs) to make a payout to you of a “FIXED AMOUNT” every month (or any other frequency) & the scheme sells relevant number of units on applicable NAV which equates to the “Fixed AMOUNT” & makes you the payout (6/n)
(a) In this feature, you tell the scheme (all except ETFs) to make a payout to you of a “FIXED AMOUNT” every month (or any other frequency) & the scheme sells relevant number of units on applicable NAV which equates to the “Fixed AMOUNT” & makes you the payout (6/n)
(b) While SWP looks good, there are a few things to keep in mind while opting for this feature,
- SWP should be preferred using asset allocation between majorly debt & a small allocation to equity savings fund but not the other hybrid or equity funds (7/n)
- SWP should be preferred using asset allocation between majorly debt & a small allocation to equity savings fund but not the other hybrid or equity funds (7/n)
- The equity component of hybrid & equity funds generally make the portfolio very volatile. There may be situations when markets are going down, your portfolio is losing and AMC will extinguish more than normal number of units to make you the payout of “FIXED AMOUNT” (8/n)
How much to withdraw?
Dont withdraw more than 6% a year in SWP. Ideally you should withdraw less than what the fund earns so that you don't dip in the capital invested for withdrawals (9/n)
Dont withdraw more than 6% a year in SWP. Ideally you should withdraw less than what the fund earns so that you don't dip in the capital invested for withdrawals (9/n)
How soon to start the SWP?
- Dont start an SWP immediately after investing the corpus, give the investment a year or 2 (preferably 3 in a debt fund to make the withdrawals tax efficient which is a major advantage vs most other fixed income products), SWP after that. (10/n)
- Dont start an SWP immediately after investing the corpus, give the investment a year or 2 (preferably 3 in a debt fund to make the withdrawals tax efficient which is a major advantage vs most other fixed income products), SWP after that. (10/n)
- As soon as the corpus is invested for a year or 2, it mostly grows in value and post that even if there is some turbulence in the future in the fund, this grown value protects you from dipping into the corpus.
- This will also avoid any exit loads if any in the fund (11/n)
- This will also avoid any exit loads if any in the fund (11/n)
Taxation?
- Each SWP will be treated as sale of units & hence there may be tax liabilities
- Equity savings will be taxed at 10% (withdrawals after 1 year) & Debt will be taxed at 20% with indexation advantage (for withdrawals after 3 years)
- Each SWP will be treated as sale of units & hence there may be tax liabilities
- Equity savings will be taxed at 10% (withdrawals after 1 year) & Debt will be taxed at 20% with indexation advantage (for withdrawals after 3 years)
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Have earlier written on,
-Sector Analysis - Banking, Paints, Logistic, REIT, InvIT, Sugar, Steel
- Macro
- Debt Markets
- Equity
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You can find them all in the link below (END)
Have earlier written on,
-Sector Analysis - Banking, Paints, Logistic, REIT, InvIT, Sugar, Steel
- Macro
- Debt Markets
- Equity
- Gold
- Personal Finance etc.
You can find them all in the link below (END)
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