Lokesh Nathany
One’s expectations from any investment are – safety, returns & liquidity. Barring mutual funds, no other investment product can meet all three expectations. However, one should know how to make the most of it without compromising on any of the three expectations.
The general perception is that mutual funds cannot provide monthly fixed amount, as the returns are not guaranteed. Also, it may not be easy for a fund manager to generate enough returns on a monthly basis, so as to pay monthly dividends to meet your requirements. Even if they do, the dates and rates may both vary every month thereby defeating the purpose of regular income.
The industry did come out with a hybrid debt fund titled – Monthly Income Plan. Though the title was suggestive but there was no guarantee that the fund will give monthly returns. However the investor’s perception was not corrected by anyone, resulting in many finding themselves in no monthly income scenario.
What is the solution to my monthly needs?
The good news is there is a solution that can meet your monthly needs. The even better news is that you will have complete control and authority to decide when, how much and what frequency you want the funds in your account to meet your expenses.
It is called Systematic Withdrawal Plan (SWP). This facility allows you to withdraw a fixed amount every month or quarter from the funds that you have invested in a mutual fund scheme. The amount chosen gets directly credited in your bank account on a fixed specified date. This will help you immensely in meeting your monthly expenses for a living.
SWP is not only useful for retired people but anyone who is in need of regular income. Besides meeting your monthly requirements, it is also a smart way of booking profits as you are withdrawing every month. I am sure you have a few questions popping in your mind about it. The below pointers should help you get answers for all the questions, thoughts and doubts that are in your mind about SWP.
1. Which type of fund should one look to invest in?
One can chose between Equity & Debt funds, as the facility is available for both the categories. My personal advice will be to choose between balanced fund and equity fund depending on your risk appetite.
2. Are returns guaranteed in SWP?
The returns are not guaranteed by any of the mutual fund schemes or features. However you are in complete control of deciding the fixed amount that you want to withdraw every month.
3. How much should I invest and how much can I withdraw every month?
The amount you should invest will depend on your current surpluses, personal expenses, needs etc. As a thumb rule, for every requirement of Rs.1000 per month, you should invest a minimum of Rs.120000.
b. Ideally you should withdraw 10% of the amount that you have invested in. So for example, if you have invested Rs.12 lakh in a fund, you can withdraw Rs.10000 every month (Rs 1.2 lakh per year).
4. Can I apply for SWP in my existing MF scheme?
Yes, you can opt for SWP in your existing scheme as well. You can also add amount to your existing scheme before opting for SWP.
Will I be withdrawing from my principal amount?
There are months when your fund will generate more then 10% annualized returns whereas there will also be months when the returns will be less then 10%. In the months where returns generated by the funds is less than 10%, you may see a small dip in your principal amount. However over a longer period of time this gap gets filled up and you will end up with surplus.
6. Is it Tax efficient?
Over a longer period of time, SWP is tax efficient. You are paying tax (@15% in the first year) and (10% post 12 months) only on the gain component and that is small compared to principal amount. Comparatively when you are investing in the interest bearing schemes, you end up paying 30%.
7. How should I apply for SWP?
a. Existing investors: Speak to your financial advisor/ distributor and tell them that you want a fixed amount. Fill up the SWP form and submit to the AMC/ Registrar for processing.
b. New investors: Once you invest in Mutual funds, you can opt for SWP in the scheme that you invested in. Mention the amount you want on a monthly basis in the application form and submit to AMC/ Registrar for processing.
SWP makes you financially self-dependent. This feature helps you live with dignity without compromising on your needs. What are you waiting for? Apply for SWP.
(The writer is Director-Strategic Alliances, MyMoneyKarma and Founder- Disruppt Thinking)
Disclaimer: Mutual funds are subject to market risk. Please read offer document before investing. The views expressed above are my personal views and does not represent views of any of the organizations that I represent.
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