The Mutual Fund Show: Regular Income Plan Options For Retirees

While an IDCW plan provides regular dividend income, an SWP allows withdrawal of a predetermined amount at regular intervals.

<div class="paragraphs"><p>(Source: Freepik)</p></div>
(Source: Freepik)

An income distribution cum capital withdrawal plan can be beneficial for retired people or those seeking regular income, according to Kshitiz Mahajan, managing partner and chief executive officer of Complete Circle Wealth Solutions LLP Pvt.

However, it depends on an individual's financial goals, risk tolerance, and income needs, he said. "(It is) important to consider the fund's performance, fees, and tax implications. And consider suitability with one's investment strategy," Mahajan said.

He lists the pros of investing in an IDCW plan:

  • Provides regular income in the form of dividends.

  • Good for retirees looking for predictable cash flow.

Mahajan also lists the cons of investing in IDCW:

  • Payouts can fluctuate, based on market conditions and performance of the underlying assets.

  • There may be periods of lower dividends.

  • Lower dividends impact income stability.

Systematic Withdrawal Plan

Because of the change in the scenario, it is better for a person to go for a systematic withdrawal plan, according to Juzer Gabajiwala, director of Ventura Securities Ltd.

According to him, the pros of investing in an SWP are:

  • Fixed frequency and amount that can be set by the investor.

  • An SWP amount can be stopped, restarted, reduced, or hiked at any time.

  • NAV does not fall due to withdrawal.

  • It's tax-efficient.

  • Capital gains tax is applicable only on the profit part of the withdrawal (LTCG> Rs 1 lakh).

According to Mahajan, an SWP offers flexibility in managing cash flow. "It allows retirees to withdraw a pre-determined amount at regular intervals," he said.

Mahajan lists the following cons of SWP:

  • Withdrawals may erode even the principal investment.

  • Erosion depends on withdrawal rate and market performance.

  • Retirees need to monitor withdrawal amounts.

Gabajiwala lists the tax applicability factors to choose SWP over dividend as:

  • TDS applicable on dividend over Rs 5,000.

  • TDS applies to investors in nil tax bracket as well.

Query 1: I have invested Rs 6 lakh in total in ICICI Prudential Equity Savings Fund and HDFC Balanced Advantage Fund. Can we switch our existing funds from growth to IDCW? Is this beneficial for senior citizens?

Name: Lathe Venkatesan | Age: 64 years

Kshitiz Mahajan: It depends on the tax slab that you are into. If you fall into a high tax slab, then growth is the right option. If she is in a lower tax slab, then she can opt for a dividend option.

Juzer Gabajiwala: Choose SWP over dividend, as tax on dividend is 12 times more than SWP. And, the effective tax rate on growth with SWP is only 2.4%. Withdrawing 10% is a very aggressive plan. Doing a 6% and taking a capital appreciation is much better than trying to be very aggressive in your withdrawal. Otherwise, you will deplete your total corpus much faster.

Query 2: I will be retiring in May 2025 and will invest Rs 25 lakh each in HDFC Balanced Advantage Fund (SWP) and ICICI Prudential Multi Asset Fund (SWP) with 7% withdrawal. Where should I invest the balance amount after deducting monthly expenses?

Name: Muizz Ansari | Age: 59 years

Juzer Gabajiwala: The category that you have chosen is pretty good. Both are reasonably conservative. Let your corpus grow for 2-3 years and after that, go ahead with a 6% withdrawal instead of 7%. If you are looking to investing the balance surplus, you should put it in an equity fund.

Kshitiz Mahajan: Generate 11-12% returns on portfolio returns. Do a withdrawal of 7% yearly with increasing portfolio value. You can use it in liquid or arbitrage fund. The balance can be invested in balanced advantage fund or large-cap index fund.

Query 3 : I have been investing in four small-cap funds for the past five years and booked some profit in 2021 and 2023. I am still sitting at a profit of approximately 100% in all these schemes. Should I book a partial profit?

Name: Vikas | Age: 49 years

Juzer Gabajiwala: Your mutual fund investment should be more goal-oriented. Trying to time the market is not advisable. Leave it to the fund manager to do the booking of the profit.

Watch the full conversation here:

The Mutual Fund Show: Passive, ELSS Or Mid And Small Cap Schemes — What's Right For You?