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Should you invest in MFs post retirement?
Published On , 29 Apr 2018 By TOI
The mutual fund industry has successfully built savings habit amongst Indians through the systematic investment plan (SIP) route. As per industry trade body AMFI data, the monthly inflow through SIPs in February 2018 was Rs 6,425 crore from around 2.05 crore accounts, translating to an average SIP amount of Rs 3,100. The assets under management (AUM) of these accounts is Rs 2.01 lakh crore, translating to an average AUM per SIP account at Rs 98,000.
The SIP book continues to grow at a rapid pace and new SIP additions in February crossed the 1 million (10 lakh) mark. Though there is no formal data on the purpose behind investing through SIPs, but one can guess that investments in these accounts would be meant for meeting the long term Goals (like retirement) of these investors. Here, I would like to highlight the role mutual funds can play for retirees.
Typically, if you are in service, you are likely to have saved in your provident fund (PF), superannuation or some other savings instrument to create for yourself a retirement corpus. On retirement, the need for regular income is generally fulfiled through a combination of pension, interest income from deposits, annuities from insurance companies, dividend income from stocks or mutual funds, rental income and so on. So the question is what role can a mutual fund play in such a scenario?
Let me just focus on how mutual funds can help you meet your need for regular income. In a mutual fund product you can invest either through a growth option or a dividend option. In a dividend option, the dividend income is tax free in the hands of the investor but the mutual fund needs to deduct dividend distribution tax (DDT) before making the pay out to its investors.
The dividend distribution tax applicable to resident individuals is 29.12% and 11.65% (including surcharge and cess) in case of Debt and Equity oriented mutual funds respectively. Dividends are not fixed or guaranteed and can get impacted with significant market movements. As a result, the dividend option may not be the most suitable option for all retirees.
The other option available is the systematic withdrawal option (SWP). You can opt for a specific amount to be paid out from your investments in a mutual fund scheme at periodic intervals (monthly, quarterly or any other period you desire) and thereby creating a flow of regular income to meet your expenses post retirement.
Is SWP tax efficient?
The best feature of SWP is its tax efficiency. In order to determine the tax liability, you need to determine the gains that accrue on the units that are redeemed under the SWP option. The example below illustrates the amount that is taxable in case of a hypothetical investment of Rs 10 lakh in a Liquid Fund.
Say the investment is made on February 1, 2018 at an NAV of Rs 2500, and the investor gets 400 units of the fund. From March onward, the investor opts for SWP and withdraws Rs 60,000 every month. On March 1, the NAV of fund is Rs 2550. Thus the investor is redeeming 23.53 units. The investor would have to pay short term capital gains tax only on the incremental gains, which in this case would be Rs 1,176 (NAV gain of Rs 50 x number of units redeemed, that is 23.53) and not on the full withdrawal amount of Rs 60,000.
Which mutual fund schemes offer SWP option?
Most, if not all, open ended schemes offer SWP as an option to investors. Since the returns from mutual fund products are not known upfront, and are linked to market movements, retirees do find it challenging (a) to identify the an appropriate mutual fund product and (b) determine the appropriate SWP amount.
You could see that the overall returns and the variation of returns is lowest in Liquid Funds. In contrast, returns and variation of returns is the highest in the Equity category. Your SWP amount should ideally be aligned to the expected returns that the fund can generate in the long run. Basis the above table, you could opt for a 6% SWP rate in Liquid Funds or 11% in Equity funds. Further, it is important to note that the outstanding amount of your investment at any given point post withdrawals would fluctuate a lot in case of Equity but would be relatively close to your original investment in case of Liquid Funds.
When should I review my SWP option?
Review your SWP rate and the outstanding value of your investments every three years and adjust the withdrawal rate as per your needs. To conclude, SWP in mutual funds can offer you the twin benefits of regular income and tax efficiency. You should allocate some amount of your retirement corpus to mutual funds and use the SWP option to generate regular income to meet your day to day expenses.
Suraj Kaeley is a senior fund industry professional
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