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Benefits of systematic withdrawal plans in mutual funds for retirees

Systematic Investment Plan (SIP) is a well-known tool for investing in mutual fund schemes. However, did you realize that the Systematic Withdrawal Plan (SWP) is just as effective at getting you a steady paycheck? You decide the SWP’s withdrawal amount, frequency, and duration based on your needs. Your bank account is promptly credited with money. SWP is a useful strategy for generating consistent income after retirement. The SWP capability can be successfully activated after retirement if you make regular investments and build up a sizeable corpus in the early years before retirement.

By selecting appropriate mutual fund schemes, retirees can use their retirement savings, gratuities, corpus, etc., and choose for an SWP. For your SWP requirement, you might take into account the MC30, a carefully curated collection of 30 mutual funds in the equity and fixed income categories that are suitable for investments.

While the SWP enables you to receive a steady stream of guaranteed income, the remaining investments in the schemes are allowed to increase over time, ultimately aiding in the growth of your capital. A SWP averages the cost of withdrawals, whereas a SIP averages the cost of purchasing.

Keep in mind that there is no assurance that your money will never be lost. You risk losing capital if your rate of withdrawal exceeds the rate at which your scheme is expanding. Therefore, for cautious investors, make sure your retirement investing portfolio includes Fixed Deposits and Senior Citizens Savings Schemes, with SWP in mutual funds as an addition.

How much should withdraw using SWP?

The advice of experts If you don’t want your capital to deplete, you should withdraw between 4% and 6% annually.
The best withdrawal rate for short-term funds is 6% annually, while it is 8% for hybrid and equity-oriented schemes for a 10-year term, according to our quick estimate (see slides below). Notably, the analysis did not account for inflation. If you have a stomach for high risk and a longer withdrawal period, equity orientated schemes may be suited for SWP. However, when investing a large sum in equities funds, market circumstances are more crucial. Before putting your hard-earned money into equity funds, talk to your financial counselor.

Taxation

The SWP is redeemed using the first-in-first-out (FIFO) system, which assumes that the units purchased first will be redeemed first.

  • Equity: If kept for more than a year, 10% of long-term capital gain tax (above Rs. 1 lakh) would be applied. 15% of the short-term capital gain tax on assets held for under a year.
  • Debt funds and non-equity funds: (For investments made on or after April 1, 2023) Taxed at the investor’s slab rate

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