With markets rising, fewer units will have to be redeemed
As the markets have hit an all-time high and valuations are stretched, investors can opt for an systematic withdrawal plan (SWP) in mutual funds to book some profits. Such a plan allows withdrawal of a fixed amount from the fund at regular intervals, thus taking out only the gains while the capital stays invested.
An SWP is ideal when equity-related investments are rising as fewer units have to be redeemed and one can secure higher unit prices than when withdrawing the whole amount at once. On the contrary, when the equity fund sees a sharp decline in net asset value, investors would be withdrawing more capital and getting less capital appreciation.
Liquidity needs
An SWP can be set up with even stocks, bonds, and exchange-traded funds. The investor can increase or decrease the amount or even stop the SWP when needed. It is better for those who require liquidity as it enables accessing money exactly when needed without having to worry if there is a steep correction in the markets. It also prevents investors from withdrawing too much from the portfolio, which could put their financial security at risk.
Moreover, an SWP helps to diversify the investment portfolio as the investor will gradually redeem the units. It helps in creating an additional source of income. For senior citizens, SWP is the most efficient way to get a regular source of income
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from investments.
Withdrawal options
Like an systematic investment plan, even in SWP investors benefit from rupee cost averaging as a certain number of units held will be redeemed regularly. If the markets are rising, then lesser units will be redeemed in SWP as compared to the period when the markets are falling. This process will help average the investor’s returns and protect from any losses if an individual sells when the markets are falling.
Asset management companies offer two withdrawal options: fixed or appreciation withdrawal. In the former, the investor specifies the amount he wants to withdraw from the investment on a monthly or quarterly basis. A fixed amount can be withdrawn either on the first, 15th or the last working day of every month or quarter. In the latter, the investor can withdraw only the appreciated amount on a monthly/quarterly basis and let the capital stay invested. The capital appreciation as on the last business day of the month can be withdrawn. The money from SWP is credited to the bank account registered with the fund house.
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SWP better than dividend option
While a dividend payment option pays money, the frequency and the amount of the dividend are not fixed and depends on the market movements and the profits made by the mutual fund company or the stock in case of direct equity investments. As a result, regular cash flow is not assured.In case of an SWP, the amount and the frequency remains fixed and even the cash flows can be altered based on the investor’s needs.
For taxation, an SWP is better than a dividend option. In case of SWP, units held over one year will be treated as equity-oriented funds and a long-term capital gains tax of 10% will be applicable for gains of over `1 lakh. If the holding period is less than one year, then the gains will be taxed at 15%. In contrast, in a dividend payment option the individual will have to pay tax on his marginal rate.
BOOKING PROFITS
* An SWP allows investors to withdraw only the gains while the capital stays invested
* It can be set up with even stocks, bonds, and exchange-traded funds
* Units held over one year are treated as equity-oriented funds for taxation purpose
