SWP best option for getting regular income

Investing for a goal involves three stages i.e. accumulation, preservation and distribution. Accumulation is the first phase where an appropriate investment avenue is chosen for the purpose. This is in consideration of the risk appetite, timelines and other related factors. The choice of fund, tenure of the fund and proportion of allocation is arrived accordingly. Enough literature is available on accumulating for a financial goal through systematic investment (SIP) of mutual funds (MF).

A periodic review of the investment plan would juxtapose the desired results with that of the actuals. Accordingly, decision is arrived either to continue the investment or make any changes to it. Whether to contribute in the same fund, change the quantum or altogether the fund is decided depending upon this comparative review.

Of course, the market conditions prevailed, contributing at the moment and a bit of extrapolation of the current situation into the future with a degree of assumption provides for a future path.

This is particularly true as the goal timelines are neared, the asset allocation is altered and so the choice of fund. Should the same fund continued in its proportion or profits are to be moved out to a safer investment, etc. The preservation phase addresses this conundrum and based on the above factors; investment decisions are made.

The distribution phase is where the accumulated corpus is to be consumed. In an event like children's education or marriage needs, the requirement is usually lumpsum where the requirement is one-time or spread over a short to very short period of time. The solution is classic as mentioned in the preservation phase, the desired amounts are moved to much less volatile or liquid investments and are withdrawn at the required time.

But, in a situation where the investments are accumulated for the purpose of retirement, etc. where the cashflow requirements are spread over a medium to long-term; transferring all of the corpus into a liquid or less volatile investment avenue doesn't help and at times could turn out to be detrimental to the erosion of the corpus quicker than desired. What better option is to be chosen to counter this problem?

Systematic Withdrawal Plan (SWP) is a very good solution to this. This is inverse to the SIP where a fixed amount is contributed for investment while in SWP a fixed amount is withdrawn to provide for the consumption requirements. SWP could be applied on the accrued corpus with a defined interval that suits the requirement and the same is reached directly into the savings bank account of the investor.

Earlier a much simpler option of dividend payouts is considered for this kind of regular requirement thought the amount of dividend could be varied with the market conditions and as per the issuer. Now, since last financial year, with the introduction of taxation of dividend income, it no more turns attractive. Instead, a SWP on an equity fund still finds for a desired outcome of supplementing for additional income.

This is particularly helpful for retail and small investors where the long-term gains withdrawn up to Rs 1 lakh per year remains non-taxed. The gains made out of the equity and equity-oriented funds are considered capital gains and for gains made out of units held for more than one year is translated as long-term capital gains. The threshold for each financial year currently stands at Rs 1 lakh through long-term capital gains (LTCG). Thus, SWP forms for a superior option than a dividend payout for not just the tax consideration (up to the limit) but also the certainty of the sums (investor could choose unlike a dividend).

Though, the 10 per cent LTCG on the equity MF could still dent the overall returns, equity remains the best bet for the long-term wealth creation with higher returns. This also scores high on the transparency and cost of return angle. A proportion of the investor's capital could remain invested through equity, yet enjoy the liquidity without much of tax hurdles through SWP. So, investors looking for a consistent income during the distribution stage could certainly explore SWP as a viable option. Of course, the amount per withdrawal and the tenure of the withdrawal would completely depend upon the corpus accumulated while performance of the fund decides the lasting of this corpus.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])