The Basics of the Systematic Withdrawal Plan

What is a Systematic Withdrawal Plan?

What is a Systematic Withdrawal Plan?

A systematic withdrawal plan, or SWP, facilitates an investor in withdrawing a fixed amount from their mutual fund every month. annual, half-yearly or quarterly withdrawals are also possible through SWPs.

Many schemes, particularly, debt-oriented ones have monthly or quarterly dividend options. However, dividends – which are acquired from profits of the scheme – are not guaranteed, every month.

The profits, or the distributable surplus, from where the dividends are sourced, depending on the market movements and fund performance. Once you understand what is a Systematic Withdrawal Plan in mutual funds, you can start reaping its many benefits.

• Benefits of SWP

1. Disciplined Investing: An SWP withdraws some mutual fund units every month, to meet monthly expenses, regardless of market levels. It, therefore, prevents the withdrawal of large amounts due to the fluctuations within the market. It also withdraws money even when markets are reaching a crest and, thus, prevents further investments, or enables staying invested in boom periods.


2. Rupee-Cost Averaging: SWPs ensure benefits for the investors when they withdraw their investments due to rupee cost averaging. Rupee cost averaging gives an investor the average NAV of a mutual fund over several months/years rather than making him dependent on a NAV at a single point of time.


3. Fixed Income: A SWP helps investors get fixed periodic amounts which prove beneficial to their personal and financial pursuits, such as, child support, retirement plans, and other possible business.


4. Tax Efficiency: Each withdrawal made through the systematic withdrawal plan mutual fund is viewed as a combination of capital and income. Tax is only payable on the income component and not the capital component. It is also more tax-efficient because it splits the income over several years. 

• Planning

Investors can use resources such as systematic withdrawal plan calculator or standard retirement calculators, in order to plan systematic withdrawals. These calculators help determine the target amount necessary for their withdrawal needs through a pre-determined utilization phase. Variables involved include age, annual salary, retirement savings income allocation, current allocation, retirement income needs, expected annual return from investment, social security estimate and other retirement fund estimates.

• Setting an SWP 

Most types of investments offer a systematic withdrawal plan. Investors can make systematic withdrawals from mutual funds, annuities, brokerage accounts, 401k plans, IRAs and more

An SWP form or a distribution form is required. Along with the form, investors can determine various distribution schedules including monthly, quarterly, semi-annually or annually. Accounts typically have a minimum balance requirement for beginning systematic withdrawals.

For convenience, investors may also specify liquidation percentages by funds for accounts with multiple holdings, which can be facilitated through a brokerage
.

Everything You Need to Know about Debt and Equity Funds

What is a mutual fund?

A mutual fund is the collected money of a large number of people (or investors) which is then managed by a professional fund manager. The collected money is then invested in equities, bonds, money market instruments and other securities.

There are many Types of Mutual Funds such as debt funds and the equity fund.

The differences between the two arise from where the money is invested.

What is a Debt Fund?

What is Debt Fund?

 A Debt Fund invests in fixed income instruments that offer capital appreciation, such as Government Bonds, corporate debt securities, and money market.

Investing in debt funds allows for a low-cost structure, relatively stable returns, relatively high liquidity, and low risk.

They are beneficial for investors that aim for:

1. Regular income.
2. Safe ventures 
3. Steady returns with low volatility.
4. Tax efficiency.

What is Equity Fund?

What is Equity Fund?

An equity fund invests in shares/stocks of companies to provide the benefits of professional management and diversification to ordinary investors.

There are two kinds of equity funds:

1. Active Fund: this is where a fund manager researches the market to look for the best stocks to invest in.
2. Passive Fund: this is where the fund manager builds an index mirroring the popular market index.
3. Equity Funds are also divided as per Market Capitalization, which is the value of a company's equity, according to the capital market.
4. They can also be classified as Diversified – where the investment is done across the entire market spectrum – or   Sectoral – where the investment is restricted to a particular sector.

The Difference Between Debt and Equity

Debt funds invest in fixed income securities, equity funds invest in equity share and related securities.

Depending on the investors’ requirements and affordability, some investors with long term goals must choose an equity fund, whereas, investors with short to medium term goals and safe ventures might opt for debt funds.

Equity funds potentially offer higher returns, but with risk, whereas, debt funds are comparatively, low risk and offer moderate to low returns.

• In terms of safety of capital, debt funds ensure better safety than equity funds.
• In terms off tax liabilities, debt funds, which are held for 36 months are taxed at 20% with indexation. 

Equity funds, which are held for 12 months or more, are exempt from capital gains tax. Equity funds held for 12 months or less are taxed at a flat rate of 15%.

How to Use Financial Goals to Secure Your Future

It is important to set up some financial goals for yourself so that your future is secure no matter how many emergencies come your way. Planning is key and you need to do your research and plan well because your future wellbeing depends on it.

If you have recently become financially independent and beginning to give you some goals, here are some things you should keep in mind:

Financial Goals

• Remember your priorities- It is very essential that you prioritize what you want for yourself in the long term. For this, you must stop yourself from unnecessary expenditures and instead invest in plans that will help you not only keep finances in check but also secure your future.

• Monitor yourself- For example, write down your expenses for the day. This will help you understand whether you are spending more than your income should allow. Plan and spend accordingly in the future.

• Invest and save- Aside from having an emergency fund, you should also put aside a portion of your income each month. The best way to do this is usually by investing in mutual funds and such schemes so that your savings not only stay safe but continue to grow due to the influx of dividends. 

The types of financial goals one should set:

There are two types of financial goals- Short Term and Long Term Investment.

1. Short term financial goals are ones which you want to take care of within five to ten years. This might include goals like going on vacations, buying a house for yourself, and clearing the credit card debts. 



2. Long Term financial goals are ones which aim at something more than ten to twelve years away. Long term financial goals include goals like saving up for your children’s college education, their weddings, and your retirement.

One of the best ways of realizing your financial goals, especially the long-term ones, is investing in schemes like mutual funds. Such schemes help you not only in protecting your investment but also return profits in the form of dividends. But, before you start thinking of investing in mutual funds, it is important that you know all about mutual funds dividends.

Mutual funds consist of a pool of money put together by collecting investment from different investors. Their investment amounts vary and may not always be equal. However, your investment is allocated by your manager to purchase other securities like bonds, stocks, shares, and notes. If these securities perform well, then you get added benefits out of it. If the commodity bought by your capital gains profits, some part of the profit is used by the mutual fund company and the rest is given to you as an income. This is known as a dividend and is paid out annually by the company. In some other cases, this dividend is directly transferred to your account or it used for issuing further shares for resale.

Everything you need to know about ELSS funds

ELSS stands for Equity Linked Savings Scheme

There are many mutual fund companies with a lot of schemes under their wing. Often, they talk about mutual funds and its many benefits. One particular scheme that you might have heard about in particular is the ELSS funds.  It is a type of mutual fund that is exempt from taxation by the Government of India.

When you invest in a mutual fund, there will be others like you who will be investing money in it as well. This money put together will be distributed by the fund manager and used to buy other securities like notes, bonds, stocks, etc. If these securities perform well and return a profit, each of you gets a fraction of the profit. Now, an equity fund is a kind of mutual fund where your money is used directly by you to buy shares of the ownership of a company so you become a shareholder. If part of the company running on your capital earns profits, you would be paid a part of the profits. This payment is called dividend.

ELSS mutual funds or simply ELSS are diversified equity schemes. This scheme falls under a special exemption of the Section 80C of the Constitution of India. These funds come in with a three-year lock-in period, which means you won’t be able to redeem your shares until three years have passed. The best part of this scheme is that it is one of the most efficient tax-saving financial vehicles.

How Does a Tax on Mutual Funds Work?

However, not everyone likes to invest in ELSS. A lot of people invest in other equity funds or debt funds. And these come with Mutual Fund Taxation, which means that there will be a tax applied to the profits you make from the equity or debt funds.



There are types of mutual funds taxes: 

• Dividend Distribution Tax – The DDT is the tax that needs to be paid by the company paying out the dividends. The company is liable to pay a fifteen percent tax within fourteen days after the declaration of the dividend payment.
• STCG tax- The short-term capital gain tax is applicable to short term holdings, a holding being the period of time for which you invest in the scheme. For debt funds, the holding period is less than three years and, for equity funds, it is less than a year.
• LTCG tax- The Long-Term capital gain tax is applicable to a holding period of more than three years for debt funds and for more than a year when it comes to equity funds.

A Guide to Dividends and Dividend Distribution Taxes

If you are someone who is looking to invest in mutual funds and other such schemes to make some extra cash on the side, the first you need to know is what the mutual fund actually is and how the mutual fund dividend works.

A Mutual Fund is a professionally managed fund which consists of money from different investors pooled together. This fund’s aim is to buy further securities like bonds, debentures (long term debt financial tool), notes, etc. If these securities perform well and gain more capital, you are in turn benefitted via dividends. It is the responsibility of the fund manager to distribute and allow the funds accordingly. There are many different types of mutual funds and schemes that work around this basic premise.

What is a Dividend?

And how does it affect your gains and losses?

What is DIvidend?

Like mentioned before, there are many different types of mutual funds. A Dividend Mutual Fund, for example, pays out in dividends. Suppose, you hold the shares of a corporation. 

Your share(s) own a certain part of the corporation and, whenever that part of the corporation earns profits, you get a portion of these profits. 

This amount of money paid out to shareholders from the gains of the company or corporation is called the dividend. The dividend is paid out annually by the company in question.

Dividend distribution is done generally through two methods. The first involves a direct payment, the dividends, in the form of cash, is deposited in the accounts of the investors. However, if the company has a dividend reinvestment plan, the same amount of money is used to buy more shares of the company, which means that you will be re-investing in the company again.

Although the income tax policy is valid for all sorts of incomes, it also applies a dividend distribution tax on the company distributing the dividends to the stockholders. Under Section 115O of the Constitution of India, the company has a tax imposed on the dividend it is paying out to the shareholders. 

The company is liable to pay the tax to the government within fourteen days of the distribution of the dividend. A rate of fifteen percent is deductible on the total amount of dividend being distributed. In case the company fails to pay the DDT within the fourteen days period, then it would be legally bound to pay an interest rate of one percent of the DDT and will have to continue doing so till the tax is paid fully.