You’ve probably heard a fair bit about Systematic Investment Plans. Now let’s tell you all about Systematic Withdrawal Plans.
What is a Systematic Withdrawal Plan?
A Systematic Withdrawal Plan can be used in connection with an open ended Mutual Fund scheme and allows investors to withdraw certain sums of the invested corpus periodically.
Additional Reading: The Beginner’s Guide To Systematic Withdrawal Plans
Withdrawals? How often?
With a Systematic Withdrawal Plan, an investor can withdraw a certain sum of money that he or she invested in the Mutual Fund. This can be done every month or every three months.
The investor can also choose to either withdraw a fixed sum or only the capital gains on the investment periodically.
How is a Systematic Withdrawal Plan better than the dividend option?
If an investor is looking to get a regular monthly income on his investment, a Systematic Withdrawal Plan would be a more reliable choice compared to being dependent on dividends from the Mutual Fund.
This is because the amount received in dividends on Mutual Funds are not fixed and are dependent on market fluctuations. In a Systematic Withdrawal Plan, an investor can withdraw a certain fixed sum on a particular date every month for a specific tenure.
Additional Reading: Top Performing Mutual Funds In India
What about taxation on Systematic Withdrawal Plans?
Systematic Withdrawal Plans allow the redemption of Mutual Fund units, which is why these redemptions are taxed in the same manner as debt and equity funds.
For equity Mutual Fund units that have not been held for more than 12 months, an investor will be required to pay short term capital gains tax.
For short term debt funds, short term capital gains tax will be levied for units held for less than 36 months. If the fund units have been held for a longer period then long term capital gains tax will be applicable.
Remember to check the exit load of the Mutual Fund scheme before you opt to put a Systematic Withdrawal Plan in place.
Additional Reading: Why Debt Funds Are A Good Investment For Beginners
Does a Systematic Withdrawal Plan have any disadvantages?
The only disadvantage of a Systematic Withdrawal Plan is that it is likely that this type of financial arrangement will gradually deplete the capital investment that you have accumulated.
Want to start a Systematic Withdrawal Plan?
You can begin a Systematic Withdrawal Plan at any time after investing in a Mutual Fund. To enforce a Systematic Withdrawal Plan, you only need to complete an instruction form and submit the same to the AMC.
What details do you need to provide when starting a Systematic Withdrawal Plan?
You need to submit the Systematic Withdrawal Plan form with the following information:
- Your folio number
- Frequency of withdrawals
- The date of the first withdrawal
- Bank account details to facilitate the credit of the withdrawals
Additional Reading: Why You Should Keep Your SIP Investment Simple
Now that you know all about Systematic Withdrawal Plans, all you need to do is choose your Mutual Fund investments carefully to set yourself up financially for the future.