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How SWP In Debt Mutual Funds Is Better Than Fixed Deposit For Regular Income?

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Many investors believe that mutual fund investments will not provide steady income flows. Others believe that dividends from mutual funds, particularly debt mutual funds, are a reliable source of consistent income flow. Both, however, need to be fixed. In the case of the former, mutual funds' Systematic Withdrawal Plan (SWP) function helps provide consistent cash flows at a set frequency. Dividends are not guaranteed and are contingent on the availability of distributable surplus from the plan.

 

SWP

SWP

SWP stands for Systematic Withdrawal Plan, and it allows investors to withdraw money from a mutual fund plan at regular intervals. This is a popular choice among investors who want to get money at regular times.

There are generally two types of SWPs. In the first option, the investor specifies a predetermined amount that is withdrawn at regular intervals such as monthly, quarterly, and so on. Investors can also withdraw the appreciated amount on a monthly or quarterly basis. If assets are kept for a long time, the SWP may become a tax-efficient choice.

The strength of a financial product is determined by its rate of return; however, the true return on an investment is the money received after taxes have been taken from the total amount returned.

Withdraw and Returns In Debt Funds and Fixed Deposits
 

Withdraw and Returns In Debt Funds and Fixed Deposits

Fixed deposits are a secure investment choice that offers stable interest rates, special rates for elderly citizens, a variety of interest payment methods, no market risk, and income tax benefits. The safety of the money is one of the first conditions for any financial investment, and the FD provides this, but the profits are not as promising as debt funds.

Withdrawals and returns on both investments are treated differently. The interest income received on Fixed Deposits is simply added to the investors' income and taxed according to their respective tax bands. However, because FDs are a fixed investment for a certain length of time, liquidity is difficult. And early withdrawal might result in a penalty.

Debt funds, on the other hand, have the advantage of easy liquidity in the event that investors wish to withdraw. The future for debt funds is likewise bright. When interest rates fall, debt markets rise.

Aside from declining interest rates, financial advisors recommend systematic withdrawal plans (SWP) in debt mutual funds as a preferable choice for investors wishing to receive a regular income from a lump investment, particularly those in higher tax brackets.

Why are SWPs more tax-efficient than FDs?

Why are SWPs more tax-efficient than FDs?

Only investments in debt funds that are kept for more than three years are considered long-term. Long-term capital gains on debt funds are now taxed at a rate of 20%. Investors, on the other hand, profit from indexation on their initial investment. This implies that the initial investment is adjusted for inflation and taxed as a result. Long-term capital gains tax is insignificant since the original cost of investment rises when inflation is factored in.

Short-term profits are taxed according to the investor's tax bracket if debt mutual fund assets are redeemed or sold before three years. Even in the first three years of investing, SWP in debt funds is more tax-efficient than fixed deposits.

Bottom Line

It's a common fallacy that only conventional goods, not market-connected products like mutual funds, can generate predictable cash flows at a certain regularity. Investors may choose the SWP, or Systematic Withdrawal Plan, for consistent cash flows, particularly in the case of debt mutual funds, which are less volatile than equity mutual funds. Short-maturity debt funds and accrual funds are more suited for SWP than long-maturity debt funds.

Story first published: Tuesday, March 15, 2022, 17:40 [IST]
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