Retirement Planning: Generating Income Through SWP's
New retirees typically face the common dilemma of how best to generate retirement income from their hard-won savings. Should they purchase an annuity, opt for a post office monthly income plan, buy real estate and earn rental incomes, or for that matter – just be content with earning FD interest? But did you know that even for post-retirement income generation, Mutual Funds Sahi Hai? In fact, Mutual Fund SWP’s (Systematic Withdrawal Plans) represent one of the simplest, most tax-efficient and high yielding income generation methods available today.
What are SWP’s and How Do They Work
Think of an SWP as a “reverse SIP”, wherein you instruct the Mutual Fund to liquidate units to the tune of a fixed rupee amount at regular intervals, and credit it to your bank account. Unlike Mutual Fund dividends, SWP’s are standing instructions - and hence the quantum and periodicity of their occurrence is fixed and predictable. Due to this, they become an ideal choice for retirees who heavily or fully depend upon their investment income to provision for their day to day living expenses. However, do bear in mind that SWP’s do not guarantee the retention of your initial corpus – in other words, if your fund has not grown at all between two successive SWP dates, the withdrawal itself will eat into your principal.
How are SWP Returns Tax Efficient?
Mutual Fund SWP returns are more tax efficient than interest income, or dividends arising from fixed income mutual funds. The reason behind this is simple – since the payout mechanism for an SWP involves the liquidation of a certain number of units, only the profits earned on those units are subject to long or short term capital gains tax, depending upon the holding period. Take the oversimplified example of an SWP of Rs. 20,000 which was generated by liquidating 200 units of a fund at an NAV of Rs. 100. Say, the purchase price of these 200 units was Rs. 90. In this example, the total capital gain arising from this SWP transaction is barely Rs. 2000 (Rs. 100 minus Rs. 90, multiplied by 200 units). Instead, if you had earned Rs. 20,000 as interest income or dividends, you’d have to pay a tax on the entire amount.
What Type of Fund Should You Go For?
If your objective is regular income generation from SWP’s, avoid equity-oriented funds and settle for debt funds instead. In doing so, you’ll be sacrificing growth for predictability and income stability, and will also be safeguarding your retirement corpus to an extent. A qualified Financial Planner from FinEdge can guide you on the most suitable portfolio of debt mutual funds at any point in time.