Best Mutual Fund Categories for SWP: Regular income is required after retirement, and for this, Systematic Withdrawal Plan (SWP) in Mutual Funds can prove to be an excellent option. Through SWP, investors can make regular withdrawals every month. If invested in the right fund category, the income from SWP is also better in terms of tax saving. We will know later which fund categories are better to invest in for SWP, but first let us understand what Systematic Withdrawal Plan means.
What is the meaning of SWP?
SWP is a mutual fund plan in which investors can withdraw a fixed amount on a monthly, quarterly or any other regular interval. It can also be called the opposite plan of SIP. In SIP, a fixed amount is invested in a mutual fund scheme at regular intervals, while in SWP, the amount already deposited in the scheme is withdrawn at regular intervals. SWP is a good option for those who want regular income after retirement. Under this plan, some units are sold or redeemed from the mutual fund scheme on a pre-determined date, and that amount is deposited directly into your bank account.
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Benefits of investing in SWP
, Regular Monthly Income:Through SWP you keep getting a fixed amount every month, which gives you financial stability.
, Tax exemption:SWP is more tax-effective than dividends. Profits earned from selling units held for more than a year in equity-oriented funds are taxed at the rate of 12.5% for long-term capital gains (LTCG), while dividends are taxed as per your tax slab. Also, there is no income tax on LTCG up to Rs 1.25 lakh in a financial year. While dividend income is taxed as per the tax slab, which can be up to 30%.
, Safety of Funds: Under SWP, even after redemption of some units every month, a large portion of your total fund remains intact, due to which your remaining investment continues to generate returns according to the market movement.
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In which fund categories should you invest?
If you wish to do SWP after retirement or for additional income, you can consider investing in these categories of mutual funds:
, Large-cap funds:These funds invest in large and strong companies, whose returns are generally more stable than mid-caps and small caps.
, Flexicap Funds:These funds invest in all types of companies, large cap, mid cap and small cap, which ensures diversification in investment as well as the hope of getting better returns.
, Equity-Oriented Hybrid Funds: These funds invest in both equity and debt, thereby generating good income with low risk.
, Balanced Advantage Funds: These funds strike a balance between equity and debt depending on the market conditions.
, Equity Savings Funds: These funds provide investment options with low risk, which are ideal for post-retirement.
Also read: Mutual Fund SIP: How to raise Rs 1.78 crore starting with just Rs 1000 every month!
Which fund categories should you stay away from?
Sectoral, thematic and small-cap funds should be avoided for SWP after retirement, as investments in these mutual funds are considered more risky and volatile. Overall, SWP of mutual funds can be a good option for regular monthly income after retirement. Benefits like tax exemption and regular income make it better than dividend plans. But investors should choose the right fund category so that their retirement fund lasts for a long time along with giving better returns.
