KNOWLEDGE CENTRE Financial Planning / How to Plan For Retirement Using Mutual Funds?
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How to Plan For Retirement Using Mutual Funds?


An important component of financial planning is to build a retirement corpus that allows you to sustain your current lifestyle. Like most individuals, you may consider pension plans as the best way to build a retirement corpus that generates regular income when you stop earning.

However, mutual funds are an excellent option to consider, in order to earn regular income post-retirement. You may accumulate a large corpus during your work life. You may invest in mutual funds through monthly Systematic Investment Plans (SIPs) to build a retirement corpus.

What Is The Difference Between Mutual Fund SWPs And Dividend Payouts?

Mutual fund returns may either be through dividends or capital appreciation using the growth option. You may choose to withdraw your dividends to earn periodic income. This option was popular until the introduction of the Dividend Distribution Tax (DDT) from June 2013. With the introduction of DDT, monthly income plans (MIPs) and debt funds offering dividend payouts became less attractive. The dilemma was then whether to choose a Systematic Withdrawal Plan (SWP) or dividend payout. Prior to making this choice, it is beneficial to understand the working of an SWP.

How Are Mutual Fund SWPs Better For Retirement Planning?

Several asset management companies (AMCs) provide you with the option of receiving regular income from your mutual fund investments. The earnings on such investment plans may be withdrawn as a fixed amount on a periodic basis. The date of withdrawal, amount, and period are pre-determined as per your needs and convenience.

There are two factors that play an important role in helping you choose amongst the two options. Firstly, you need to consider your cash flow requirements to make the decision. Secondly, the tax efficiency of these options must be taken into account to make the right choice.

Let us elaborate further on these two factors:

  1. Why Are Mutual Fund SWPs A Reliable Source of Pension?

    When you opt for dividend payout on your mutual fund investments, it is at the fund manager’s discretion because the dividends depend on the distributable surplus. Moreover, the date and amount of such mutual fund returns are not fixed and may not match your cash flow requirements.
    On the other hand, if you choose an SWP you are assured of receiving a fixed amount on a pre-determined date. Therefore, the shortcomings of dividend payout namely timeline and amount may be overcome with a systematic withdrawal plan. Certain equity funds also offer fixed dividend payout and frequency and you may choose these.

  2. What Are The Tax Benefits Offered By Mutual Fund SWPs In Retirement Planning?

    Dividends received on your equity investment plans are taxed at 10%. However, all non-equity investments are liable to a 28.84% DDT. The AMC pays this dividend tax, which eventually is borne by investors like you. When you opt for an SWP, every withdrawal is considered as a sale. If you withdraw before a period of three years, the profits are considered as short-term capital gains. These profits are added to your income and taxed as per your slab.

If you withdraw your money after three years, the profits are considered as long-term capital gains. Long-term capital gains tax is payable after taking into account the indexation benefit. This allows you to reduce your profits, which in turn reduces your tax liability. However, if you invest in equity funds, there is a 10% long-term capital gains tax when you hold your investment for a period of at least one year.

Today’s world is dynamic and you need to maximize your benefits through the different options that are available to you. Tools, such as systematic withdrawal plans allow you build wealth over the long-term while fulfilling your requirement of earning a regular income, especially during your post-retirement years.

Even if you now know which option between dividend payout and SWP is more beneficial for you, investing in the right mutual funds is very important. Several AMCs offer different mutual fund schemes in equity, debt, and balanced plans. Making the right investment decision may be difficult because it is a time-consuming procedure. Furthermore, it requires in-depth analysis and evaluation, which requires a certain level of technical skills.

In case you lack these skills, ARQ, our investment engine is here to help you. As an integral highlight of our Angel Bee mobile application, ARQ uses advanced and scientific tools like algorithms and quants to analyze over a billion data points. These results are matched with your financial goals, lifestyle, and risk appetite to offer customized investment recommendations. All this analysis is automated with no human intervention eliminating all bias.


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