Are you nearing retirement or planning to take a sabbatical from work – maybe, just a break to bring up your children or to pursue some other passion, for a while. As great as it may sound, have you planned how you are going to meet your monthly expenditure during the years of retirement or your break from work?
All your work life, you would have heard of best investments to build a corpus that you can use later on in life. But what if you want to build a corpus that you can use to fund your monthly expenditure for a period of time?
Of course, you can invest in FDs, Post Office Monthly Income Scheme or Monthly Income Funds, but again, most of these offer dividend payout which is not a fixed monthly amount, and may end up being much lesser than what you need.
A good option for many investors would be to invest in Systematic Withdrawal Plan or SWP. The opposite of the very popular Systematic Investment Plan (SIP) where one invests a fixed amount of money in mutual funds to build a corpus, in SWP, one withdraws a fixed amount of money at fixed intervals (monthly, quarterly or annually) from a lumpsum amount invested in a fund.
SWP in balanced funds:
Balanced funds or hybrid funds are good options for investors looking for less risky but modest returns. Spreading the risk between debt and equity, balanced funds are also considered to give better returns for SWP where the investor stays invested over longer period of time. Balanced funds invest 65% in equity and remaining in debt, averaging out the market risk to quite some extent. Over time periods longer than 5 years, they have historically performed better in terms of SWP than debt as well as equity funds.
SWP in balanced funds is a great option for retirees who can party invest in fixed income schemes such as Post Office Monthly Income Scheme and partly in balanced fund SWP.
Taxation on SWP in balanced funds
SWP allows you to pay tax only on the amount withdrawn. In debt funds, if money is withdrawn before 1 year, short-term capital gains tax may be applicable. However, long term capital gains tax which is applicable later is much more tax effective at 10% or 20% with indexation. Withdrawals from equity funds after 12 months are tax free as long-term capital gains from equity are exempt from tax. Balanced funds with 65% exposure to equity are taxed similar to equity funds, making them much more tax effective than debt funds and less risky in nature than equity funds.
Whether you are planning to retire, taking a break or starting out on your investment journey, getting in touch with India’s financial doctor, Dr. Celso, author of “Who says money doesn’t grow on trees?”, can give you the exact guidance you need to propel in the right direction.