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Child Special: The Back-Up Plan

Child Special: The Back-Up Plan
DP Singh, CMO and ED, SBI Mutual Fund
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When it comes to money; chances are that the best of plans may sometimes fail. While there are few financial instruments that exist to tide over such situations, you could use your existing investments to help you tide over emergencies from time-to-time. Take for instance a situation when your college going child needs money to prepare for competitive exams towards higher studies? You may not have accounted for this when you were saving for college education. So, what do you do in such a scenario?

The sum may not be that much that you need to borrow, but it may also not be that less for you to dip into your savings. Worry not; you can dip into your long-term investments to tide over such emergencies with a Systematic Withdrawal Plan (SWP) instruction with your long-term investments. A SWP is the direct opposite of a SIP and is a facility by which you can withdraw a certain amount of money from your existing investments in mutual funds at period intervals (monthly or quarterly). So, when you initiate a SWP, a fixed sum is withdrawn every month by liquidating the required number of units based on the NAV of the scheme at the time of withdrawal.

“SWP can help you with income during certain phases in life other than retirement too and are more tax efficient than traditional investment options.” - DP Singh, CMO and ED, SBI Mutual Fund

“SWPs can provide you with a very tax efficient route for regular cash flows,” says D P Singh, CMO and ED, SBI Mutual Fund. For instance, you could structure a quarterly SWP to meet such expenses when your children are studying in college to meet any unplanned expenses that they need money for. “SWP can help you with a steady source of income when you need supplemental income due to changing circumstances and needs,” explains Singh.

Moreover, there is no TDS on capital gains when you start an SWP, which is a very convenient and tax-efficient route to creating an alternate income stream. In case of equity investments kept for more than a year, the tax liability is Nil and only short term capital gains tax of 15 per cent is applicable on withdrawals from equity investments within one year. If planned well, you could actually dip into your investments, with no tax implications whatsoever. In case of SWP on debt funds, tax is applicable only when the investment is held for less than three years.

“Tax implication on SWPs in the case of debt funds is only on the gains made and not the principal at the time of part withdrawal, which makes the overall tax implication low,” explains Singh. This is a huge relief compared to withdrawing from traditional savings oriented fixed-return instruments. The role of mutual funds is under-appreciated by most investors, but, it is one instrument which is flexible in many ways to meet the various needs of investments keeping in mind convenience, liquidity and tax efficiency. And, just the way SIPs help you in accumulating a corpus over time, SWPs can help you smartly dip into the corpus to meet the need for cash from time-to-time.

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