If you are looking for regular cash flow from your investments in mutual funds,a systematic withdrawal plan (SWP) will help you automatically redeem a predefined amount of your investment at regular intervals. Asset management companies cater to two types of investor needs one,where an investor withdraws a fixed amount every month and the other,where an investor withdraws only the capital appreciation and not the initial capital. Moreover,with even dividends from diversified equity mutual funds to be taxed at 5% under the new direct taxes code (DTC),investors can take the growth option and pull out the gains through an SWP. So,under the DTC which is likely to be implemented from April 2012,it is better to opt for SWP than choosing a dividend plan if you are a long-term investor in mutual funds. In SWP,if one has invested for less than a year,short-term capital gains tax would be applicable. However,if withdrawals are made after a year of investment,long-term capital gains would be applicable. SWP also helps an investor,especially a pensioner,to work out the cash flow as per ones requirement. Lets assume a retired person requires Rs 20,000 a month to meet his monthly expenses. Assuming that he receives a pension of Rs 10,000 a month and Rs 5,000 as interest from fixed deposits,he can set up a SWP on an equity fund to generate a cash flow of Rs 5,000 a month. The problem,however,arises when the equity fund suffers sharp decline in net asset value. The investor would then be withdrawing more capital and getting less capital appreciation. Though most often SWP is a no-charge service,mutual fund houses charge an exit load if the investment is redeemed before six months to one year. Says Lakshmi Iyer,head (fixed income and product),Kotak AMC: SWP is a very useful tool for individuals as it allows investors to withdraw money from a mutual fund scheme at pre-determined intervals. Such a facility is more relevant at post-retirement stages where there may not be a regular source of income. This facility could serve as a source of regular income to meet expenses. Moreover,SWP holders are able to secure higher unit prices than those who withdraw the whole amount at once. Iyer explains that in an SWP,an investor instructs the mutual fund company to withdraw a certain amount at regular intervals. This gives the benefit to an investor especially in an upward trending market. For instance,assume an investor redeems his investments at current market level (x). Three months later,if market is at x+5%,the SWP investor tends to gain. In a falling market,the investor stands to lose. However, investors tend to get average pricing in SWP,making it an attractive option and less vulnerable to market fluctuations. The other advantage of SWP is that it scores over dividends in case of debt mutual funds because they incur lower tax. On paper,an investor doesnt pay tax on the dividend received from any mutual fund. The mutual fund house pays a dividend distribution tax (DDT) on the dividend paid for debt-based funds. But this burden is passed on to investors by deducting the amount from the funds NAV. The DDT can range from 12.5% for balanced and debt funds to 25% for liquid or money market funds. As of now,only equity mutual funds,where 65% of the fund is invested in stocks,are exempt from DDT. Also,since the income you get through SWPs is by way of redemptions and not dividend,there is no dividend distribution tax. Technically,though both dividends and systematic withdrawals mean partial liquidation of the fund capital for tax purposes,these are treated differently. In order to avoid short-term capital gains tax,one should not redeem anything within a year of investing. Advantage SWP * SWP enables investors to systematically withdraw money from their investment * Such an equity exposure also helps the income-substitution portfolio * Its a hedge against ups and downs of markets * Most often SWP is a no-charge service * SWPs score over dividends in debt mutual funds as they incur a lower tax
