Joint family system was the traditional construct in our country. In a joint family construct, assets and expenses were shared – financial needs of family members who did not have income, were taken care of by family members who had income or by income from joint assets. With nuclearization of joint families, senior citizens are more vulnerable because they now have to meet their financial needs from their savings. However, despite nuclearization of families caused by career or other considerations, many Indians still retain their traditional cultural values – one of the important family values being, taking care of aged parents. Children living in other cities or countries still send money regularly to their parents and stand by them during emergencies.
While children want to help their parents, at the same time, they also have to plan for their own financial goals. Our financial goals are both short term and long term in nature. Capital appreciation is the key objective of our long term investments. On other hand, income is the most important financial need of your senior citizen parents. With Father’s Day (June 17, 2018) approaching, we will share with our readers an interesting investment solution that can help you plan for your long term goals and at the same time, create an income stream for your father / parents which can provide them confidence.
Systematic Withdrawal Plan
Systematic Withdrawal Plan (SWP) is a smart investment solution, which can create wealth in the long term and at the same time generate regular income. SWP is also highly tax efficient for the investor. In an SWP, you make a lump sum investment in a mutual fund scheme of your choice and instruct the Asset Management Company (AMC) to redeem a fixed amount on a particular date (selected by you) every month or quarter (depending on your needs). Proceeds from the SWP are credited to your bank account.
It is important for investors to understand that in an SWP, cash-flows are generated by redeeming units of the fund where you have invested. The number of units redeemed every month (or any other frequency) will depend on your desired fixed SWP amount and prevailing NAVs. The balance units after monthly (or any other frequency) redemptions for the SWP remain invested in the fund. If NAVs rise over time, then lesser number of units will be redeemed – lesser the number of units redeemed to meet the SWP requirement, higher will be your investment value over time. On the other hand, in periods when NAVs fall, more number of units will have to be redeemed to meet your SWP cash-flows – during those periods your investment value will fall.
It is therefore, very important to determine how much you draw through SWP. If your withdrawal rate is very high, you may end up redeeming all your units, sooner than your expectations. Ideally, your withdrawal rate should be lower than the average long term returns of the fund, so that you can ensure cash-flows and also enjoy capital appreciation. You need to balance your cash flow needs and capital appreciation aspirations. If you want high capital appreciation, you should draw less – lesser you draw, more units will remain invested over time. Units remaining invested will earn profits and the profits in turn will earn more profits – this is known as power of compounding. If you want higher income, then you should invest more.
SBI Bandhan SWP
The most important feature which distinguishes SBI Mutual Fund Bandhan SWP from a plain vanilla SWP is that the benefits are not restricted by ownership. In a normal SWP, the beneficiaries (person who receives the SWP cash-flows) are the investors, co-investors (joint investors) or nominees of the investors (if the investor passes away). In SBI Mutual Fund’s Bandhan SWP, you can have any immediate family member as the beneficiary of the SWP.Eligible beneficiaries include child / sibling aged 15 years and above, spouse and parents of the investor.
If you want to help your parents and also plan for your own long term financial goals, then SBI Mutual Fund’s Bandhan SWP can be a good solution. You (and your spouse, if she is the joint holder) will retain ownership of the investment and the long term capital appreciation benefits thereof. At the same time, you will be able to supplement your parent’s income from their investments, with additional cash-flows which will get credited directly to their bank accounts.
Additional income is a confidence booster for senior citizens and can help them sustain or even improve their lifestyles in an inflationary environment. Further, the money transferred to your father / parents will be treated as a gift. Under current tax laws, there is no gift tax if the beneficiary receives the gift from a relative. Therefore, no incidence of taxation will apply to your father / parents for the money received from you. However, your father / parents should note that, if the money transferred to them earns interest (e.g. savings bank interest etc.), then the interest will be taxable as per the applicable income tax rate of your father / parents.
Read more about SBI Mutual Fund Bandhan SWP: Income Solutions for the family
SWP can create cash-flows for your father and also create wealth for you
Let us see how SWP can create both cash-flows and wealth for investors. In this example, we started an SWP with an initial investment of Rs 10 lakhs in SBI Magnum Equity Hybrid Fund – Growth Option (erstwhile SBI Balanced Fund) 20 years back. The monthly SWP amount was Rs 7,000. The chart below shows the cumulative money drawn through SWP and the value of the investment.
Source: Advisorkhoj SWP Returns Calculator
Over 20 years, your father would have received a cumulative income of nearly Rs 17 lakhs from your SWP (much more than your initial investment) and at the same time, your Rs 10 lakhs investment would have multiplied nearly 4 times to Rs 38 lakhs. If your withdrawal rate was a little lower, then your wealth could have multiplied much more.
Taxation of SBI Bandhan SWP
Though the SWP income for the beneficiary in SBI Bandhan SWP is tax exempt for the beneficiary, the investor has to pay capital gains tax. If you are starting SBI Mutual Fund’s Bandhan SWP from an equity fund, then withdrawals made within the first year of investment will be subject to short term capital gains tax. 15% short term capital gains tax plus cess will be levied on the profits made in the units redeemed for SWP. Withdrawals made after 1 year of investment will be subject to long term capital gains (LTCG) tax. Long term capital gains (LTCG) of up to Rs 1 lakh will be tax free. Long term capital gains above Rs 1 lakh, will be subject to 10% tax plus cess.
If you are starting Bandhan SWP from a debt fund, then withdrawals made within the three years of investment will be subject to short term capital gains tax. Profits made in the units redeemed for SWP in the first three years will be taxed as per the income tax rate of the investor. Withdrawals made after 3 years of investment will be subject to long term capital gains (LTCG) tax. Long term capital gains will be taxed at 20% plus cess after allowing for indexation benefits.
How to start SBI Bandhan SWP?
You can start SBI Bandhan SWP with the following steps:-
- If you are an existing SBI Mutual Fund investor, you can start SBI Mutual Fund’s Bandhan SWP from your existing investment in any open ended mutual fund scheme of SBI Mutual Fund. If you do not have investments in SBI Mutual Fund then you first need to invest in growth option of any open ended mutual fund scheme to avail of Bandhan SWP. Please note that, Bandhan SWP can be done only from growth option of a scheme. If you have invested in dividend or dividend re-investment options, you should switch over to the growth option by filling out the transaction slip available on SBI Mutual Fund’s website and submitting to the AMC or the RTA.
- To initiate SBI Mutual Fund’s Bandhan SWP, you should specify beneficiary details, withdrawal amount and duration of SWP. The beneficiary should be your family member. Eligible beneficiaries include child / sibling aged 15 years and above, spouse and parents of the investor. The beneficiary availing the facility should be a resident Indian. The minimum monthly withdrawal amount is Rs 5,000 and minimum duration is 12 months. The investor needs to submit the KYC documents of the beneficiary. If the beneficiary is KYC compliant, then only the acknowledgement copy is required. Else the investor must submit proof of identity and proof of address documents. Since the Bandhan SWP facility is available only for family members, proof of relationship between investor and beneficiary needs to be submitted. Passport, PAN card, Marriage Certificate etc. where the name of the beneficiary is mentioned can be submitted as proof of relationship.
- For crediting SWP payments to the beneficiary’s bank account, cancelled cheque leaf of the Bank account or Copy of Bank Statement/Passbook of the beneficiary family member needs to be submitted.
We started exploring this world for the first time, holding the fingers of our father. For most of us, he was not only the provider when we were kids, he was the teacher (in the practical world at least, if not academic too), our encyclopedia (remember the endless questions you asked him), the authority we looked up to but also person who loved unconditionally. His only interest was our well-being and growth. As a senior citizen today, all your father needs is your love and reassurance. Creating an income stream for him, so that he is not subject to interest rate and inflation dynamics, can be a wonderful Father’s Day gift to him.
SBI Mutual Fund Bandhan SWP helps your father / parents and you by creating income for your parents and capital appreciation for you over a sufficiently long investment horizon. For more details on SBI Mutual Fund Bandhan SWP and the best investment options for you, consult with your SBI Mutual Fund financial advisor or contact the SBI Mutual Fund office nearest to you.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content developed in this article has been provided by Advisorkhoj.com and is to be read from an investment awareness and education perspective only. SBI Mutual Fund’s participation in this article is as an advertiser only and the views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.