Systematic Withdrawal Plan is somewhat similar to Systematic Investment Plan in the sense that it is also done periodically and on consistent basis but it is of exact opposite nature that of Systematic Investment Plan. A Systematic Withdrawal Plan enables an investor to withdraw their investments from mutual funds scheme in a systematic and a phase wise manner. This withdrawal could be done on monthly, quarterly, semi-annually or annually basis. Also, the withdrawal amount could either be fixed or variable in nature. Systematic Withdrawal Plan provides the flexibility to withdraw investments in installments unlike lump sum withdrawals. In Systematic Withdrawal Plan, an investor channelize their investment from the plan to the savings account. This strategy is aimed at dealing with market fluctuations. Systematic Withdrawal Plan lets an investor to modify the cash flows as per their needs Investor may decide to either redeem just the capital gains on their investment or the fixed amount. In this way, investor shall not only have their capital still invested in the mutual fund scheme, but will also be able to use regular returns and income. The capital that an investor withdraw could either be reinvested in another fund or could be retained by him in the form of cash.
When an investor select a Systematic Withdrawal Plan, it influences his mutual fund account as well. It is vital to observe that a Systematic Withdrawal Plan is not as similar as opening a fixed deposit bank account where the investor receives monthly interests on regular basis. In the fixed deposit scheme, the invested principal value is not affected when an investor redeem the interest amount. However in the scenario of systematic withdrawal plan in mutual fund schemes, the amount of investor’s fund is declined by the number of units withdrawn.
To understand the concept of Systematic Withdrawal Plan thoroughly let us take an example.
Suppose an investor Pawan has 6,000 units in his mutual fund scheme and he wish to withdraw Rs 3,000 every month using his Systematic Withdrawal Plan. Take an assumption that the Net Asset Value of the scheme is Rs 30. The redemption of Rs 3,000 from this scheme will imply that 100 units are being sold, which is Rs 3,000/NAV of Rs 30. The residual units in investor’s mutual fund after the redemption shall be 5,900 units (6,000-100). At the beginning of the next month if the Net Asset Value of investor’s scheme increases to Rs 50, then the redemption of Rs 3,000 would mean selling 60 units, which is Rs 3,000/NAV of Rs 50. The mutual fund would be left with 5,840 units after this redemption (5,900-60). Thus, with each withdrawal, investor’s mutual fund will see a reduction in its units. At higher NAVs, investor might withdraw fewer units to meet the cash needs. On the other hand, as the NAV declines, it would have the contrarian effect, mandating the withdrawal of more units. A crucial aspect of making most use of this plan and gaining from it is by planning the Systematic Withdrawal Plan, and focusing on investor’s needs, objectives and end goal. The Systematic Withdrawal Plan might have an adverse impact on the value of investor’s fund if he opts for unplanned and unsystematic withdrawals.
The Systematic Withdrawal Plan has the following benefits:
Taxation plays a crucial role in redemption through a Systematic Withdrawal Plan. In case of debt funds, if investor’s holding period is less than 3 years, then the amount that investor redeem shall form a part of investor’s income. It will then be taxed according to investor’s income slab. On the other hand, if the holding period is more than 3 years, then the long-term capital gains will be taxed at 20% with indexation. In case of equity funds, if investor’s holding period is less than 1 year, then the redemption amount will be taxed at the rate of 15%. On the other hand, if the holding period is more than 1 year, then the long-term capital gains will be taxed at 10% without indexation. An open-ended fund gives investor an option of withdrawing the investment or adjusting it at any time. Let us also understand why Systematic Withdrawal Plan is a wise investment strategy. These redemptions are not subject to tax deductions at source. Although the capital gains are taxed on the redeemed amount. Investors might also opt for setting up their withdrawal in such a manner that they only draw the appreciation that is made on their investment amount. This keeps their money invested while at the same time, they enjoy the gains on periodic basis.
A Systematic Withdrawal Plan enables an investor to withdraw their investments from mutual funds scheme in a systematic and a phase wise manner. This withdrawal could be done on monthly, quarterly, semi-annually or annually basis.
When an investor select a Systematic Withdrawal Plan, it influences his mutual fund account as well. It is vital to observe that a Systematic Withdrawal Plan is not as similar as opening a fixed deposit bank account where the investor receives monthly interests on regular basis. In the fixed deposit scheme, the invested principal value is not affected when an investor redeem the interest amount. However in the scenario of systematic withdrawal plan in mutual fund schemes, the amount of investor’s fund is declined by the number of units withdrawn. At higher NAVs, investor might withdraw fewer units to meet the cash needs. On the other hand, as the NAV declines, it would have the contrarian effect, mandating the withdrawal of more units.
The Systematic Withdrawal Plan has some of the benefits such as Discipline, Rupee Cost Averaging, Fixed Regular Income, Strategy to deal with Market fluctuations and Taxation benefits.
The investor benefits as he or she decides to redeem through Systematic Withdrawal Plan rather than redeeming a lump-sum amount in one go as the previous option provides the benefit of rupee-cost averaging. The phase wise withdrawal gives investor monthly cash-flows and gives his capital a longer time period to multiply.
Taxation plays a crucial role in redemption through a Systematic Withdrawal Plan. In case of debt funds, if investor’s holding period is less than 3 years, then the amount that investor redeem shall form a part of investor’s income. It will then be taxed according to investor’s income slab. On the other hand, if the holding period is more than 3 years, then the long-term capital gains will be taxed at 20% with indexation. In case of equity funds, if investor’s holding period is less than 1 year, then the redemption amount will be taxed at the rate of 15%. On the other hand, if the holding period is more than 1 year, then the long-term capital gains will be taxed at 10% without indexation. An open-ended fund gives investor an option of withdrawing the investment or adjusting it at any time.