28 August 2017

Systematic Withdrawal Plan - SWP



What is SWP?

In simple terms SWP is the exact opposite of SIP.
In a SIP you invest in instalments or EMI and create a Lump sum, in a SWP, you invest a Lump sum and withdraw in Instalments or EMI.

Let us take an example:
Say, I have Rs.15 lakhs Lump sum. I invest the amount in a Debt Fund of a Mutual Fund. A Debt Mutual Fund invests money in Bonds and Wholesale Bank Deposits (CD) and hence is able to give a certain return without volatility. Though returns are not guaranteed, a certain rate can be assumed-in the current circumstances, let us assume 8% annual return. This means the monthly return is 0.6667%.

Let us assume that I instruct the Mutual Fund for a SWP of 10000 every month – this comes to 0.6667%. In other words, what I get as a return, I am withdrawing every month-so my principal amount remains the same.

Instead of investing in a bond fund , I can also invest in a Balanced Fund where returns could be 12-13% per annum, or Equity Fund giving 15-16 % - for a long term horizon like 5-10 years. However, this return could fluctuate in the short term of 1-3 years. If I need a guaranteed post-retirement I can remain invested in the Balanced/Equity Fund for the long term while going in for Systematic Withdrawal on a monthly basis. My monthly withdrawal amount needs to be aligned with the type of Fund that I am initially investing in.

What about Taxation?
Debt funds will be subject to short term capital gains (at the rate of your Income Tax) for a period upto 3 years and long term capital gains beyond 3 years (20 % after indexation)

Balanced and Equity Funds will be subject to short term capital gains tax of 15 % upto 1year but are
exempt from tax beyond 1 year.

Let’s take an example:

Fund : Debt Fund
Invested Amount 15,00,000
Investment Date 1/1/2017
Date of 1st Withdrawal 1/2/2017
Assumed Annual rate of Return: 8%
Monthly Rate of Return: 0.6667%
SWP Instalment : 10000/ month
Income Tax Rate 10%

Date
NAV
Amount Withdrawn
Units withdrawn
Balance Units
Capital Gains
Capital Gains Tax
Value of Balance Units






10%

01-01-2017
10


150000



01-02-2017
10.067
10000
993.377
149006.623
66.228
6.623
1500001
01-03-2017
10.134
10000
986.798
148019.825
132.018
13.202
1500001
01-04-2017
10.201
10000
980.263
147039.562
197.372
19.737
1500002
01-05-2017
10.269
10000
973.771
146065.791
262.294
26.229
1500002
01-06-2017
10.338
10000
967.321
145098.47
326.785
32.679
1500003
01-07-2017
10.407
10000
960.915
144137.555
390.849
39.085
1500003
01-08-2017
10.476
10000
954.551
143183.004
454.489
45.449
1500004
01-09-2017
10.546
10000
948.229
142234.774
517.708
51.771
1500004
01-10-2017
10.616
10000
941.949
141292.825
580.507
58.051
1500005
01-11-2017
10.687
10000
935.711
140357.114
642.891
64.289
1500005
02-11-2017
10.758
10000
929.514
139427.6
704.862
70.486
1500006












Total Capital Gains Tax

427.6





Prasad wagle 

Financial Advisor