How can my brother Invest in mutual fund schemes under SWP

Thanks for writing to us and we can understand the need of your brother who is retired. Please go through the following in order to know more about SWP from mutual funds –

As your brother’s immediate need is regular income, he can invest in mutual funds and draw a regular return his investments by way of SWP. SWP helps draw a fixed amount on a fixed date every month through. He can invest a lump sum amount in a balanced fund (if he can take moderately high risk and the investment horizon is minimum 5 years) and start drawing a fixed amount every month on a fixed date. He can submit the SWP transaction form along with his lump sum investment and the AMC will credit the amount decided by him in his bank account on the date chosen by him. However you need to note the following in case of SWP from balanced funds –

1. The profits made on all the SWP withdrawals from balanced fund up to 12 months from the date of investment will attract short term capital gains tax which is currently at 15%. To avoid this, you can start the SWP after 12 months and in that case capital gains will be tax free. Like equity funds, long term capital gains on balanced funds are also tax free.

2. However, if he needs regular income immediately and do not want to pay the above short term capital gain tax, you can invest a portion of the lump sum amount in a liquid fund or ultra-short term fund and start drawing a fixed amount immediately. For example – He wants to invest Rs 10 Lakhs and draw Rs 7,500 per month from balanced funds. He can split the investments in two parts –

1) Invest Rs 90,000 in a liquid fund/ ultra-short term fund and draw Rs 7,500 per month during the first 12 months and exhaust the entire investment. However, even after withdrawing his entire investment, some amount will be left in the folio which is his gain from the investment in liquid/ ultra-short term fund. The gains made on liquid/ ultra-short term fund will be added to his income and taxed according to the income tax slab applicable to him.

2) While investing Rs 90,000 in liquid funds, ensure that he invests the remaining Rs 910,00 on the same date in balanced funds and start SWP after 12 months. All the SWP withdrawals after 12 months, from balanced fund will be tax free. The gains made on liquid/ ultra-short term fund will be added to his income and tax to be paid according to the income tax slab applicable to him.

3. The other thing he need to keep in mind is that he should not draw more than 9-10% during the first 2-3 years of his investments in balanced funds. Withdrawals can be increased in future depending upon how the fund performs over a period of time.

4. In your brothers case, our specific suggestion would be as follows –

– Invest Rs 96,000 in a liquid or ultra-short term fund and draw Rs 8,000 per month during the first 12 months

– Invest the rest Rs 904,000 (assuming total investment of Rs 10 Lakhs) in balanced funds and draw Rs 8,000 after 12 months through monthly SWP. Therefore, all his withdrawals will be tax free

While you can go through all of the above and try understand what would be ideal for him, we suggest that you should take a help of a mutual fund advisor in your city if you are new to mutual funds. If the mutual fund advisor is good, he will help you in preparing your KYC ( as you will be investing for the first time in mutual funds), suggest good funds, help you in your investments and shall also take care to service your investments in future.

With regards to top performing balanced funds, you may consider investing in ICICI Prudential Balanced Fund, DSP BlackRock Balanced Fund L&T Prudence Fund and HDFC Balanced Fund.

Hope you find the above useful. Thanks for writing to Advisorkhoj.