Most people turn to Fixed Deposits with Banks as a means to get regular income, especially during retirement. Fixed Deposits have their own merits, due to their simple structure, predictable payout and convenience. In this episode, we wish to explore an alternate mechanism for regular income, called Systematic Withdrawal Plan (or SWP).
We all are familiar with SIP, where a fixed amount is invested in a mutual fund at fixed interval. SWP is just opposite of SIP, where it allows you to withdraw a fixed amount from the mutual fund at regular intervals. Question is: Is it better to invest in a mutual fund and withdraw using SWP, compared to a Fixed Deposit which pays periodic interest? Yes, it is. Let us look at how?
Compared to a fixed deposit, SWP brings all the benefits of investment in a mutual fund to your portfolio. This translates to a better tax treatment, higher capital appreciation, flexibility of investment options as per your risk profile and liquidity.
Let us start with flexibility of investment with SWP.
Compared to a FD with bank which is only a debt instrument, here in SWP you could choose from Equity mutual funds, Hybrid mutual funds or Long Term or Short Term Debt Mutual Funds as per your risk profile, and start an SWP on your investment. Hybrid funds are generally favoured for SWP, because of their ability to give better returns compared to Debt while keeping the market fluctuations lower than pure Equity mutual funds.
SWP redemption is as per first in first out (FIFO) method wherein units first bought are assumed to be redeemed first. Thus, your tax incidence on SWP depends on FIFO method and holding period.
With a Mutual fund and SWP, the capital grows despite the withdrawals, subject to market conditions, whereas the Principal remains same in Fixed Deposits. Hence a Mutual Fund with SWP could potentially provide an inflation beating return better than Fixed Deposit.
In the long run a Mutual Fund with SWP will give a higher return, compared to a Fixed deposit where a 5 year+ FD might attract a lower interest rate.
And finally, in a Mutual Fund with SWP, one can opt out of the scheme as per his will, subject to exit load (if applicable), but in Fixed Deposit a pre-mature closure would result into lowering the applicable interest rate.
Now you know that a SWP could be a better option compared to a Fixed deposit to meet your regular income needs. We hope you have learnt something new today, as it is our constant endeavour to educate and make an ‘investor’ a ‘sound investor’! Happy Investing!