Wealth is a goal everyone aspires for. The difference
between wishing for it and realizing it is in investment
planning.
And whilst the wisdom of investing prudently is indisputable,
it also pays to know just how and when to disinvest.
A systematic withdrawal plan (SWP)
is a smart way to plan for your future needs by withdrawing
amounts systematically from your existing portfolio either to
reinvest in another portfolio or to meet your expenses. This
is feasible without putting your investment portfolio to additional
risk and yet continue to derive relevant tax advantage. Sounds
interesting? Explore it further.
How does
it happen?
Typically you invest in a growth plan of an open ended fund.
Thereafter, you opt to withdraw a fixed amount or variable
amount at regular intervals. The amount so withdrawn shall
be converted into units at the applicable redemption price
and such units shall be reduced from the outstanding unit
balance.
Here’s how a SWP works
for you
It helps plan your payments as the withdrawal
is in line with your commitments – the amount is
made available to you just when you need it. Such withdrawal
could be monthly, quarterly or half-yearly as specified
by you, based on your requirements and commitments.
Your savings no longer remain idle. Your
money can earn better returns if reinvested, instead of
lying idle in a savings account for meeting your regular
payments.
It smoothens out the fluctuations. When you withdraw
periodically, you are independent of market movements
and thus your average withdrawal value is higher than
the average cost price.
This illustration demonstrates how this happens:
Month
Amount
Invested (Rs.)
Amount
Withdrawn
Purchase
Price (Rs.)
Sale
Price
No.
of Units Purchased
0
50,000
12.50
4000.000
1
2000
12.60
158.730
2
2000
12.70
157.480
3
2000
12.65
158.103
4
2000
12.80
156.250
5
2000
13.00
153.846
6
2000
12.95
154.440
Total
50,000
12,000
12.78
3061.150
You will see how the average sale price takes care
of the market volatility and helps you get a reasonably
higher price for your units than what you would have
got, had you withdrawn in one stroke.
It brings you tax advantages. Since your
withdrawals are from capital, and if the gains are long
term in nature you pay tax at a lesser rate. Let us analyse
this illustration:
Suppose you invest Rs.1,00,000 in a growth plan on say
April 1st 2003 and opt for SWP of Rs.5000/- on a monthly
basis to commence after 1 year, say from May 1st 2004.
The income, post tax would be as follows:
Purchase price on April 1st 2003 is Rs.12.00 per unit.
Units allotted would be 8333.333:
Date
of Withdrawal
NAV
Units
Redeemed
Units
Balance
Cost
of Redeemed Units
Long
term Capital Gain
Tax
Amount
Net
Amount
1st May'04
13
383.729
7949.6
4604.75
395.25
0
4999.9889
1st June'04
13.1
381.097
7568.51
4573.16
426.84
0
4999.9926
1st July'04
13.2
378.501
7190.01
4542.01
457.99
0
4999.9982
1st Aug'04
13.3
376.222
6813.78
4514.66
485.34
0
4999.9904
1st Sep'04
13.4
373.971
6439.81
4487.65
512.35
0
4999.9923
1st Oct'04
13.5
371.471
6068.34
4457.65
542.35
0
4999.9997
Here, the income net of tax is high and would be better
than what you earn by way of dividend payout otherwise.
As easy as can
be
SWPs are available from mutual fund investments. If you don’t
have one yet, come and open an account with us. We’ll provide
you with an SWP option best suited to your needs. Come to BSDL
to make the most of your hard earned savings.
