By Uttam Agarwal
Most senior citizens, especially those who have retired from service, are in a fix. As interest rates are on their way down, fetching a decent return on their retirement corpus is posing a challenge. The rate of interest on bank fixed deposits, a popular investment option for the retired, has fallen so much that in most leading banks it is offering a rate below the savings bank interest of some other banks. Even other investment options such as Senior Citizen Savings Scheme, monthly income scheme of post office, etc., are offering lower rates than in the past and the rates are expected to fall further.
That leaves the retired seniors or those who are nearing retirement to actively consider the SWP option of mutual funds. SWP-Systematic Withdrawal Plan- has proved to be a useful tool for meeting the regular income needs for people nearing retirement and those retired.
Redeem units at a regular interval
Simply put, SWP is a mechanism under which the investor after investing a lump sum in a MF scheme, provides a mandate to the fund house to systematically redeem units at a regular interval. The amount redeemed comes to the investor’s bank account to help meet the regular household needs or enhance the monthly income of the investor.
Ideally, to make the SWP work the best, invest a lump sum in a debt mutual fund scheme. If you need a fixed amount at a regular interval or want to redeem a fixed number of units, the mandate can be provided to the fund house.
For example, if one wants a fixed amount of Rs 35,000 or Rs 55,000 each month, the SWP feature in mutual funds can help the investor to get it after investing a lump sum amount in the MF scheme. Alternatively, one can set a fixed withdrawal rate each month or on an annual basis to meet the regular income needs. Under SWP, only a portion of your investment (including growth, if any) comes back while the balance remains invested and continues to offer an opportunity for generating returns.
Tax-effective than other fixed income
One of the biggest advantages of the SWP feature is that it is more tax-effective than other fixed-income investment options such as bank FDs. One can use SWP option as an annuity, i.e., a series of payments received at regular intervals which could be monthly or quarterly. With increasing life expectancy, someone who retires at age 60 may need regular income till 90 or even beyond.
Any gains from an equity MF scheme within 12 months or from a debt mutual fund scheme within 36 months is treated as short term capital gains (STCG) and taxed at 15% and as per the applicable tax slab of the investor, respectively. Beyond these holding periods, long term capital gain (LTCG) is applicable. On gains above Rs 1 lakh from equity funds, a tax of 10% applies while gains in debt funds are taxed at 20% after adjusting for indexation.
SWP in mutual funds offers better benefits than bank fixed deposits and annuities. The potential of better returns exists in SWP and it also comes with the advantage of liquidity. The funds in bank FD and annuities get locked up for the long term, while SWP can be customised as per the need. Most importantly,inflation may play a spoilsport in annuities and FDs, while debt funds come with the advantage of indexation to tackle inflation.
It is better for senior citizens to invest a lump sum in debt funds and then after three years, set up SWP in them. This helps to keep the capital safe and also generate high effective post-tax returns. Senior citizens, therefore, can take advantage of the SWP option in funds and reap the benefits of safety, liquidity, potential of enhanced returns, etc., while investing their retirement corpus.
The writer is chief business officer, Bajaj Capital