In 3 basic questions on SWP answered, we looked at the best time to opt for a SWP, the various withdrawal facilities and how long it should last. Apparently, we missed a very important question which a reader brought to our notice.
Instead of opting for a SWP, can one get a cash flow with a MIP?
While technically the question makes sense, it points to a grave misunderstanding of the SWP and MIP. Let’s get that out of the way first.
The Monthly Income Plan, or MIP, is a structured product. It is a debt-oriented hybrid fund with marginal exposure to equity. Each fund has its own mandate which sets the equity limit anywhere from 10% to 25%, maybe even 30% in a few select cases.
The Systematic Withdrawal Plan, or SWP, is NOT a product. It is merely a facility that allows for disciplined withdrawals from a mutual fund – it could be any fund; equity, debt or hybrid. It is a great way to structure a retirement income.
When you automatically take money out of your mutual fund on a regular basis (fortnightly, monthly, quarterly), it is called a systematic withdrawal. At the set, predetermined date, units from your fund are sold and the money is sent to your bank account. Of course, you are given the discretion as to whether you should withdraw a specific flat amount (for example Rs 10,000 every quarter) or an appreciated amount.
Here’s why a MIP cannot replace a SWP.
The cash flow is not guaranteed in a MIP. The ‘monthly income plan’ does not guarantee a monthly income by way of dividends. Dividends are given to the investor depending on the fund’s ability to generate returns. Remember, it is a market-linked product, and there is never an income guarantee with such a product.
On the other hand, let’s say you sign up for a SWP in an equity fund for Rs 5,000 every month on the 5th of every month. Every month, on that date, that amount of money will be credited to your bank account. You are assured of a guaranteed cash flow.
As mentioned above, the MIP is a debt-oriented fund. So the returns will be muted when compared to those from an equity fund. To add to it, when dividends are declared, dividend distribution tax (DDT) is levied which acts as a deterrent since the investor gets less in his hand.
In How to turn your fund into a retirement paycheck, we had explained the reasoning of investing in an equity fund and conducting an SWP from there. Do read that to get clarity on this point. Having said that, the average 3-year annualized returns of debt-oriented hybrid funds has varied from 10.16% to 11.88%, depending on their allocation to equity. It goes higher for the category averages of equity large-cap (12.14%), flexi-cap (15.59%) and mid- and small-cap funds (20.78%). Do note, these are just category averages, the returns from specific funds would be higher.
Once again, we reiterate the point made in our earlier posts. Invest systematically in an equity mutual fund and when it is time to retire, terminate the SIP and switch to SWP to get a cash flow.
