- How should I deploy the retirement fund?
- How should I spend money so that your corpus lives longer than you?
- How do I withdraw money from my corpus such than inflation is taken care of and at the same time, my wealth is not eroded quickly?
Fund houses offer two options -
Fixed Amount SWP – A fixed amount can be withdrawn on a regular basis – monthly quarterly or half yearly or annually
SWP up to the amount of capital appreciation – The investor can withdraw the amount by which the initial investment has appreciated.
It is important to draw up a strategy where you withdraw more every year as compared to the previous year as you need to keep up with inflation but at the same time, you have to be careful that the corpus does not shrink significantly.
SWP can be initiated in liquid funds, debt funds or equity funds. There are many Monthly Income Plan(MIP) options in the market. Though most of them pay out regular dividends, they do miss it out too. Moreover dividend distributed is taxed in the hands of the Mutual fund. This leads to lesser dividend to be distributed. It is better for a retiree to invest in suitable funds and use the SWP strategy. A retiree can invest in liquid funds, MIPs or debt funds or equity funds and use the SWP strategy.
If funds are required in the near short term, liquid funds can be used. If one is a conservative investor, debt funds can be used.
Let us assume, Mr. Raman is a retiree with a corpus of Rs. 20,00,00.
He invests Rs. 5,00,000 in a FD.
He invests Rs. 5,00,000 in a Debt Mutual Fund.He has set up the FD such that he will get interest payout every 6 months.
He has set up an SWP plan with the Debt Mutual fund to redeem the capital appreciated every 6 months.
This ensures that he gets regular income flow.
Here are the tax implications on returns in different investments -
- The long term capital gains in equity mutual funds are exempt from tax.
- For debt mutual funds, short term gains tax is the the tax slab you fall in for the capital gains. The capital gains is the difference of the NAV multiplied by the number of units redeemed.
- Long term holding period is 3 years. Long term capital gains are taxed @ 20% with indexation.
- Interest income on Fixed Deposits is added to the person's income are charged tax as per the income tax slab the person falls in.
In case of the Debt MF, he will have to pay the short term gains tax of 30.9% on the appreciation that has been withdrawn for the first 3 years. After that he has to pay tax of only 20% considering indexation.
The returns on Fixed Deposits have been falling for some time now. Moreover, one has to pay penalties to withdraw from FD prematurely.
Debt Mutual Funds usually give better returns compared to Fixed Deposits. You can withdraw money from the MF anytime. It is quick and if you are withdrawing after 1 year of investment, there are no load charges.
In the long run, he would pay lesser tax on the Debt Mutual Fund compared to the FD provided taxation rules do not change significantly. The Debt MF would have appreciated more in most scenarios.
An SWP – Good Tool to manage regular income and get tax benefits