Mutual fund investors wanting regular stream of income can opt for the Systematic Withdrawal Plan (SWP) facility provided by mutual funds. Through SWP option, you can set a pre-determined amount to be received from mutual fund investments at pre-decided intervals. In other words, you can customise the cash flow as per your requirement — withdraw either the capital appreciation on your investment or a fixed amount.
SWP helps an investor to stay with the scheme (which can earn market-linked returns), while enjoying regular income. The withdrawal can be either weekly, monthly, quarterly, half yearly or yearly. SWPs are allowed in growth and dividend plans of open-ended funds.
SWP has become an attractive option for investors post the Budget which abolished the dividend distribution tax (DDT) on the dividend declared by mutual funds and made dividends taxable in the hands of investors. This has made dividend plans less tax efficient compared to growth plans. Earlier, DDT under both equity and non-equity funds was lower than the effective marginal tax rates applicable, in particular for investors in the higher tax brackets (under old tax regime).
You can start SWPs from the schemes you have invested in by sending a filled application form to the asset management company’s (AMC) investor service centre or to the Registrar and Transfer agents (R&T). Many AMCs, online distributors and R&T agents such as CAMS and MF Utility enable investors to start SWPs online through their web portals and mobile apps.
Some AMCs allow only fixed-sum withdrawals. However, IDFC, L&T, HDFC, Aditya Birla Sun Life and Kotak also allow investors to withdraw the capital appreciation on investments.
You can also cancel the SWP. The request for this must be submitted 7-15 days before the next SWP due date. SWPs will terminate automatically if no balance is available in the scheme or if the enrolment period expires.
Tax efficiency
SWP withdrawals from mutual funds attract tax. As per the current tax structure, redemptions made from equity-oriented funds within 12 months from the date of investment attract short-term capital gains (STCG) tax at 15 per cent. Redemption after 12 months qualifies for long-term capital gains (LTCG) tax at 10 per cent on the gain over ₹1 lakh. On the other hand, sale of debt funds units within 36 months attracts STCG tax, which is as per the investor’s income-tax slab; sale after 36 months qualifies for LTCG tax at 20 per cent with indexation.
Hence, starting SWPs in equity-oriented fund after a year and in debt funds after three years from the date of investment will help lower your tax outgo.
Selection of the right scheme based on your risk profile is important. Investors with a high risk profile can opt for equity funds and those with a low to medium risk appetite can choose debt or hybrid funds.
Here, we suggest three mutual fund schemes from different categories for conservative investors, to set up SWP. These funds have been selected based on the quality of the portfolio and the performance based on rolling return.
Canara Robeco Conservative Hybrid Fund
This fund suits conservative investors wanting marginal exposure to equity. It is one of the above average performers in the conservative hybrid fund category, allocating 21-25 per cent in equity while the rest in debt papers. Performance, as measured by the three-year rolling return calculated from the past five years’ NAV history, shows that the fund delivered a compounded annualised return (CAGR) of 6.6 per cent, which is almost on par with the category average of 6.7 per cent.
The fund manages a high-quality portfolio. The equity portfolio is managed with multi-cap mandate. At least two third of the equity portion is invested mostly in large-cap stocks that helps the fund contain market downturns but it may also relatively underperform peers in market rallies. On debt side, it has invested only in the highest-rated AAA bonds. It takes active duration calls based on the interest rate movement. Average maturity of the debt portfolio ranges between 2.8 and 7.1 years.
The fund offers only fixed-sum withdrawals and the dates for SWP can be 1st or 5th or 15th or 20th or 25th of the month.
IDFC Banking & PSU Debt Fund
It is one of the few funds in the Banking & PSU Debt Fund category that invests only in AAA/A1+ rated bonds. It invests predominantly in papers issued by banks, PSUs and PFIs. The fund follows ‘roll down’ investment strategy which keeps the average maturity of the portfolio steady or reduce and does not increase it significantly. This strategy works well in volatile markets, such as now, reducing rate risk. The average maturity of the portfolio has been reduced from 3.7 years to 2.8 years over the last one year.
Performance, as measured by the three-year rolling return calculated from the past five years’ NAV history, shows that the fund delivered a CAGR of 7.5 per cent, while the category posted 7.6 per cent.
SWP dates can be 1st or 10th or 20th date of the month. Both fixed-sum and capital appreciation withdrawals are allowed.
L&T Short Term Bond
Funds under the Short duration category invest in debt papers such that the Macaulay duration of the portfolio is between 1 to 3 years. Short duration funds are all weather funds maintaining the optimum balance of yield, accrual income, safety and liquidity.
It is one of the few funds in the category that invests only in the highest rated debt papers. The fund follows mainly accrual strategy (relying on interest income), and additionally takes duration calls without taking too much interest rate risk. It holds a large number of debt papers (currently 160) in its portfolio offering diversification.
The three-year rolling return calculated from the past five years’ NAV history for the fund was 7.4 per cent (CAGR), while for the category, it is 6.8 per cent.
SWP dates are 1st or 5th or 7th or 10th or 15th or 20th or 25th or 28th date of the month. Both fixed-sum and capital appreciation withdrawals are allowed.