- 2 years ago
- How does IDCW, which is dividend-based, work?
- Is a systematic withdrawal plan or SWP a better option?
Ventura Securities' Juzer Gabajiwala and Complete Circle's Kshitiz Mahajan share views.
- Is a systematic withdrawal plan or SWP a better option?
Ventura Securities' Juzer Gabajiwala and Complete Circle's Kshitiz Mahajan share views.
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Hi, you're watching the Mutual Fund Show.
00:09 I'm Tamannaah Enamdar.
00:10 The topic we've picked today has actually
00:13 come from the feedback of our viewers.
00:16 So one of our viewers wrote in to us
00:18 and asked a question which has actually
00:20 struck up a conversation.
00:22 Her question was-- and we'll pull it up for you--
00:25 about whether an ITCW works better or should she go for a SWP.
00:32 Now let me contextualize this before we get to our experts.
00:35 We keep talking about what investments to make,
00:38 how to invest in SIPs, how small and consistent investment
00:44 portions at a regular interval is
00:46 going to get you the right growth in your mutual funds.
00:50 But what about when you want to actually get some of that
00:54 money?
00:55 Now this particular viewer of ours
00:58 wanted to know that in retirement,
00:59 what is the best way?
01:01 Should she go in for an IDCW, which is essentially
01:05 a dividend option, or an SWP, which
01:08 is a systematic withdrawal plan?
01:11 So we thought that this is a great occasion for us
01:14 to explain what these two options are, compare them,
01:19 and ask our experts to break this down.
01:21 That's the query that came in from Lata Venkatesan,
01:26 64 years.
01:27 And Lata, thank you so much for writing in.
01:29 She wrote in saying, I have invested 6 lakh in total
01:33 in ICSA Approved and HDFC Balanced Advantage Fund.
01:37 Can we switch our existing funds from growth to IDCW?
01:41 Is this beneficial for senior citizens?
01:44 Now let me start by welcoming our guest today.
01:48 I'm joined by Juzair, Juzair Gabajiwala,
01:50 Director of Ventura Securities, is with us.
01:53 I'm also joined by Shitej.
01:55 Shitej is also joining in today.
01:57 Shitej Mahajan, Managing Partner and CEO
01:59 of Complete Circle Wealth.
02:01 Welcome to both of you, and thank you so much
02:03 for speaking with us today.
02:04 Now, why I found this question particularly interesting
02:09 is because it's talking about the other end of the spectrum.
02:11 At some point, your entire purpose
02:14 of investments in mutual funds is
02:16 to enjoy the fruits of that investment.
02:19 And what is the best way to do it,
02:21 especially if you are a retired person
02:23 or you now want some steady income out of it.
02:26 So with that, let me begin with Juzair.
02:28 To explain these two options,
02:31 when I say an IDCW or dividend option versus an SWP
02:36 or systematic withdrawal plan, what does that mean?
02:40 Because we don't want people to just get caught up
02:42 in the jargon.
02:42 What are these two options?
02:44 - Thank you, Tamanna.
02:47 Thank you for having me on the show.
02:49 And actually, this is a great topic,
02:52 and it's actually one of my favorite ones.
02:55 It is actually complicated for many investors.
02:58 So just to give a bit of a context,
03:01 previously IDCW was actually being called
03:04 as dividend payout.
03:05 But effective from 1st April '21,
03:08 SEBI has changed it to IDCW,
03:11 which basically means income distribution
03:14 and capital withdrawal.
03:16 So the dividend which is there of a mutual fund
03:18 should not actually be compared
03:21 with that which a corporate declares dividend.
03:23 A corporate declares dividend out of its profits, right?
03:27 And in case of a mutual fund,
03:28 it is nothing but buying and selling of securities.
03:32 So that is a basic primary difference.
03:35 And previously what used to happen
03:37 is that dividend was tax-free.
03:39 In fact, the tax was being paid
03:41 at the mutual fund house level.
03:43 So it was tax-free in the hands of the investor.
03:46 But now the whole scenario has changed,
03:48 and because of the change in the scenario,
03:52 it is better for a person to go
03:55 for a systematic withdrawal plan.
03:57 So a systematic withdrawal plan
03:59 also acts in the same manner as an IDCW,
04:03 but basically it is more tax efficient.
04:06 So the tax efficiency is the most important reason
04:10 that a person should actually opt for a SWP.
04:13 And it has got its various advantages,
04:15 and in fact, very little disadvantage.
04:19 So it is very, very important for an investor
04:22 to try to opt for an SWP
04:25 and not go for an IDCW as an option.
04:28 - So if there is such a big difference between the two,
04:34 who actually and why should anyone
04:36 actually go in for an IDCW?
04:38 Let me come to Shruthi on this.
04:39 Shruthi, great to have you back on the show.
04:41 And let's begin with the basics,
04:43 how you see these two concepts.
04:45 And also let me add another layer to it.
04:47 When does an investor know that it's time
04:50 to come in for any of these options,
04:53 where instead of only having credit flow one way,
04:56 you are actually withdrawing some of your investments
04:59 in intervals?
05:02 - Good afternoon, Tameruma.
05:05 I think the context has been set very beautifully.
05:07 So when it's the time to withdraw,
05:10 you have to check what type of tax bracket you are in.
05:14 So let's first of all simplify what are the various brackets
05:19 which these two things fall in.
05:20 Dividend is, or let's say ID,
05:24 what we say that IDCW is basically on the basis
05:28 of what tax bracket you are in.
05:30 Let's say somebody who's having a 10% tax bracket.
05:32 So whatever dividend they are getting
05:34 as a part of their withdrawal,
05:36 that's been taxed at 10%.
05:38 Somebody at 20% will be taxed at 20%.
05:40 But in equity, when you do SWP,
05:43 or let's say you find a way
05:45 through which you are withdrawing money,
05:47 then long-term capital gain is 10%.
05:49 And capital gain is only on the gain.
05:51 When you withdraw money,
05:52 it moves like people, first in, first out.
05:55 So some part of principal goes,
05:56 some part of your appreciated amount
05:59 as a part of equity investment goes.
06:02 So here, depending on what tax bracket you fall into,
06:05 you have to take a fall.
06:06 Let's take for example, somebody who's getting retired,
06:09 and is not making income which is more than
06:11 seven, seven and a half rupees.
06:12 So there's no tax.
06:14 So once you withdraw this money,
06:16 and let's say on amount of the example
06:19 which Lata ma'am has given,
06:21 he or she has asked the question,
06:23 six, 10 rupees you want to participate in withdraw,
06:25 let's say 10% every year,
06:27 that means 60,000 she want to withdraw.
06:29 And if after withdrawing that amount also,
06:31 if your tax bracket has still been on the zero tax slab,
06:34 you there'll be no tax on the amount which you have withdrawn.
06:37 Let's say if it's added,
06:38 and the tax bracket has moved to 10% slab,
06:40 then you're paying 10% tax.
06:42 So it depends that what tax bracket you are into
06:45 will guide you that whether you want to do a dividend
06:47 or SWP, number one.
06:49 Number two, it depends on the certainty
06:52 of what type of amount which you need on a monthly basis.
06:55 Dividends are not a certain thing.
06:58 It looks like many of the AMCs on various schemes,
07:00 they have been regular in paying dividend
07:02 on a monthly basis,
07:03 but this is not something which is certain.
07:05 But SWP, let's say if your expenses depends on,
07:09 let's say it depends on the withdrawal
07:11 which you are making from your investment,
07:13 your monthly expenses depend on that,
07:15 then I think SWP is a better option
07:16 where you can decide,
07:18 let's say X amount or Y amount,
07:19 what amount you want to withdraw
07:20 or what type you want to withdraw.
07:22 Because there's a certainty of withdrawal
07:24 in systematic withdrawal plan,
07:25 which is not there in dividend.
07:27 Dividend option might surprise you
07:30 in a month or two where a company,
07:33 any team is not paying you a dividend.
07:34 So these two things has to be taken into account
07:37 when you're looking for a dividend option
07:39 or a SWP option.
07:41 - So depend in parts on what stage of your life you are in,
07:46 whether you want your essential corpus
07:48 to keep dipping with an SWP or not,
07:52 would that also be a factor?
07:54 And, you know, Sridhar, since you mentioned Lata's question,
07:58 let me pull that up again
07:59 and let's address her specific query as well,
08:03 which we wanna talk about,
08:04 because she is talking about the 10% amount
08:08 that she wants in, she wants a 10% return.
08:10 And she says that I've invested 6 lakh in total
08:13 in ICSA approved equity savings fund
08:16 and HDFC balanced advantage fund.
08:18 Can we switch our existing funds from growth to IDCW?
08:23 Is this beneficial for senior citizens?
08:25 So in her specific case, Shruthi,
08:28 what would be the advice you would give?
08:30 - Again, it depends on the tax slab
08:34 in which she is falling into.
08:36 So if she is falling into a high tax slab,
08:38 then growth is the right option.
08:40 If she's not falling into high tax slab
08:43 and either minimalistic tax slab or no tax slab,
08:46 then she can go to a different option,
08:49 what she's asking about.
08:52 Second part, which is important,
08:54 if she want to use this as an income withdrawal fund
08:58 and she want to keep on increasing her overall capital
09:02 appreciation after withdrawal also,
09:04 then she has to move out of the savings fund,
09:06 savings funds to a better maybe balance advantage fund also.
09:10 So that can include only 6-7% return.
09:12 When on a balance advantage fund category,
09:14 you can still expect 19% return
09:16 over a long period of time.
09:18 So that second change which she should do
09:22 on the fund allocation side also,
09:24 that's what I feel is the right way of doing it
09:26 because you can target 19% overall return
09:29 and you can expect a withdrawal of 6%
09:31 up to 6% on any basis from your capital appreciation.
09:34 And second, as I said, it totally depends
09:36 on what slab you're in.
09:38 Because equity long-term capital gain is 10%.
09:40 And that's the most friendliest tax instrument
09:44 in the country after agricultural income, if you ask me.
09:47 But if she's in no tax slab, then I think for her,
09:52 I think it's much better that she should stay,
09:56 she should move to a different option.
09:59 - Yeah, so tax slab is key.
10:01 We don't have that details for Lata,
10:02 but I hope that's useful for her.
10:04 Juzair, what would be your response
10:06 to her particular query?
10:07 - So I'll give her a very simple example.
10:11 In fact, that's what we address with many clients.
10:15 So we just did a back testing of data.
10:17 We took, supposing one of the most popular scheme
10:21 was HDFC balance advantage.
10:23 So if somebody had invested on 31st March, '23
10:26 and we have a one year data.
10:30 On a 10 lakh investment,
10:32 if he had opted for a dividend option,
10:35 you'd have received a total dividend of around 97,000.
10:40 Now, depending upon 30%,
10:42 you would have been paying tax of,
10:44 maybe around approximately 29,000.
10:47 And if it was 10% tax bracket,
10:49 you would have paid a 9,700 tax.
10:53 Now, because this investment,
10:55 and let us say the same amount was withdrawn
10:58 by an individual, every month,
11:01 exactly the same amount we took as a withdrawal
11:04 for one year.
11:05 So he withdrew exactly around 97,000.
11:08 And if he had taken capital gains,
11:10 and now in this particular case,
11:12 he would have actually paid short term capital gains
11:14 because it was less than one year.
11:18 His taxation would have come to just around 2,800 rupees.
11:22 So there is a huge difference for somebody
11:25 even in a 10% tax bracket,
11:27 as compared to a person,
11:30 opting even for IDCW.
11:33 So I see a great merit in SWP,
11:37 specifically like how Shrithi also mentioned,
11:39 that it gives you the flexibility
11:41 of defining your withdrawal.
11:43 And my only second thing,
11:45 advice to Lata would be is that,
11:47 10% is a very aggressive withdrawal.
11:52 Because look at it like that,
11:53 if I'm looking at a fixed income instrument,
11:56 today no fixed income is going to give you
11:59 a 10% post tax return.
12:02 So you should try to do a withdrawal
12:04 of roughly around 6%.
12:06 So which pre-tax would be around 8%
12:08 or even 7% for somebody in a 10% tax bracket.
12:12 So doing a 6% and taking a capital appreciation
12:16 is much better than trying to be very aggressive
12:19 in your withdrawal.
12:21 Because ultimately otherwise,
12:23 you would deplete your total corpus much more faster.
12:27 - So that comes to the question
12:29 that I was also asking Shrithi,
12:30 and I'll bring this to Juzair.
12:32 At what point do you decide to go for an SWP?
12:36 So Lata Venkatesan is 64,
12:40 and she's asked the question
12:42 in the context of a retired person.
12:44 Is this an option A, only for retired people?
12:48 And then does that calculation have to sort of come in?
12:51 What is your corpus?
12:53 How much do you need to spend?
12:55 And what is the kind of lifestyle you want to live?
12:57 And for how long you want it?
12:59 I mean, somewhere at that back of the envelope
13:01 kind of calculation needs to be made, Juzair.
13:03 - She'll have to decide that,
13:07 what is the amount she needs every month,
13:08 because that is not something that we can tell.
13:11 But ideally speaking,
13:12 if supposing, if somebody wants a cash flow,
13:16 ideally speaking, you should try to build up a portfolio
13:19 in a growth scheme for at least around two to three years
13:21 in a balanced advantage fund type of a thing,
13:25 be a little bit conservative,
13:28 so that you get some accumulation
13:29 for the period of at least two to three years.
13:32 So, and then you start your withdrawal.
13:34 And the withdrawal ideally should not be more
13:37 than six to 7% from there.
13:40 So if supposing the total return
13:43 is going to be around 10 to 12%,
13:45 so you can withdraw around six to 7%,
13:47 and you can still enjoy three to 4% capital appreciation
13:50 down the line, because most,
13:52 no investor likes to see a depletion
13:54 in the value of investments.
13:57 So that is something which will take care
13:59 if you be conservative in your withdrawal.
14:01 - You know, I just want to take that question
14:06 to Shruthi as well.
14:08 And is this only an option for retired people,
14:12 or that kind of a calculation that you make?
14:16 - Mana, very interestingly, sir has said it rightly,
14:20 but I just add to what he said.
14:22 Problem in today's life is not that how much money you want.
14:26 Problem is that you're going to live long.
14:28 If you want to retain that lifestyle
14:30 which you, and what you're retiring,
14:32 then you have to build a corpus.
14:34 Some months, many of my friends,
14:36 many clients they ask that,
14:37 let's have, let me have,
14:38 let's say corpus of five crore, 10 crore.
14:40 There's a monster bar, you know, inflation.
14:43 And we keep on talking about 6%, 7% inflation,
14:46 who said it's more than 8, 9%.
14:48 So you should have an inflation
14:49 between investment returns.
14:50 If you, let's say participate in an index fund only,
14:52 it can give you 11% return over the next 10, 15, 12 years,
14:56 because your index fund return
14:57 can be in line with your nominal GDP.
14:59 Now coming back to SWP,
15:01 once you have a corpus with you,
15:03 so, you know, why SWP is important?
15:06 Many people say that when we are at age of 50,
15:09 we should go more on fixed income side.
15:12 My only suggestion to them is,
15:13 if they don't require lump sum investment,
15:15 I think SWP works really beautifully.
15:17 One reason, right now,
15:18 long-term capital gain on equity is 10%.
15:21 And when you do a SWP,
15:23 your principal and your appreciated amount,
15:25 it goes in a proper, you know, ratio.
15:29 So, take for example,
15:30 somebody has participated in 1 lakh rupee,
15:32 and it has become 2 lakh rupees.
15:34 And when you want to withdraw some amount,
15:36 it will go principal as well as appreciation
15:37 in a proper proportion,
15:38 depending on how much amount you're withdrawing,
15:40 because it works like a fee-for.
15:41 So tax liability, exactly when,
15:44 during the lifespan where you're withdrawing your funds,
15:46 initially is not more than 2, 3, 4%.
15:48 And later also, it's 5, 6% only.
15:51 Because you want to leave something on the table
15:52 for other people also.
15:54 And many people say that,
15:55 "No, I don't know, maybe I will live to 75, 80."
15:57 Nobody knows how you're gonna,
15:58 and how much longer you're gonna live.
15:59 If you want to maintain that lifestyle,
16:01 I think you should have allocation
16:04 to what 10% plus allocation return,
16:06 which can be a balanced advantage fund,
16:08 or let's say a large cap fund, a combination of,
16:10 and you should withdraw, as said by sir,
16:12 not more than 6% on a yearly basis from that point.
16:15 So that your corpus will still keep on growing,
16:18 and you have that comfort of withdrawing money
16:19 as and when you want.
16:20 Let's say it's a lump sum investment,
16:22 or I'm sorry, lump sum,
16:22 whatever it is, then you can withdraw the fund also.
16:24 So that's a right approach, a better tax efficiency,
16:28 and a better, and there is a certainty of amount
16:30 which is coming and hitting your bank account.
16:32 You decide, "Okay, I want 1,50,000 first of every month."
16:34 It will come to your bank.
16:35 Come what may,
16:36 whether it is going to come or not going to come.
16:39 - So let's begin with this query,
16:41 which is coming from Mui Zansari, who's 59 years.
16:45 The goal is guidance.
16:47 Says, "I will be retiring in May 2025,
16:50 "and will invest 25 lakhs each
16:52 "in HDFC Balanced Advantage Fund, SWP,
16:56 "and ICICI Prudential Multi-Asset Fund, SWP,
16:59 "with 7% withdrawal.
17:01 "Where should I invest the balance amount
17:04 "after deducting monthly expenses?"
17:07 You know, this ties in perfectly
17:08 with what we were discussing
17:10 in the first part of this show as well.
17:12 Juzair and Shitej, still with us.
17:15 Let me come to you first, Juzair.
17:17 On this query that Mui Zansari has.
17:19 Though the question essentially is
17:21 where he puts the balance money,
17:23 but what is your take on the two funds he's mentioned?
17:26 25 lakhs each in HDFC Balanced Advantage
17:29 and ICICI Prudential?
17:30 - So I will not give any specific fund advice,
17:35 but in terms of the category,
17:36 I think the category which he has chosen is pretty good
17:40 in terms of the both are reasonably conservative.
17:43 My only concern is that, you know,
17:45 we are coming from a high level of market right now.
17:49 From, you know, we have had a spectacular run
17:52 in the last financial year.
17:55 So whether 24, 25 will behave in the same pattern,
17:59 I don't think so.
18:00 So he will have to, you know,
18:02 narrow down his expectations.
18:05 So within one year, whether he'll be able to, you know,
18:07 withdraw, because like I said before,
18:09 ideally you should, you know,
18:10 let your corpus grow for at least around two to three years
18:14 to start withdrawing.
18:15 So if at the end of one year,
18:17 if he gets a return of around 10 to 12% in the fund,
18:21 then I think it will be good.
18:24 Post that he can start withdrawing.
18:26 I still maintain that he should look at a 6% withdrawal
18:30 and not a 7%, you know, withdrawal
18:34 as his, you know, monthly expenses.
18:38 Now, what I assume from what he's talking about is that,
18:42 and you can correct me if I'm wrong,
18:44 I'm assuming that his withdrawal, what he is doing,
18:47 out of that, he will be meeting his expenses
18:49 and he'll be having a surplus which is going to be left out.
18:53 So if he's looking at investing in the balance surplus,
18:56 ideally he can look at, you know,
18:59 into putting it into an equity fund,
19:02 a more as a large and mid cap,
19:03 because basically he will be converting his income element
19:07 into bringing in more capital.
19:10 And maybe after two, three years, he can, you know,
19:13 top that money back again into his purpose,
19:17 which he is building up for a multi-asset
19:19 or a balance advantage fund as a category.
19:22 - Shruti, very quickly, your take on this question
19:26 and would you want to give any advice
19:29 on the funds they've chosen?
19:31 - So broadly I agree with what Saru is saying,
19:33 but I think multi-asset category will not be able
19:37 to generate more than 7, 8% return.
19:39 And BAP, I will take 9 to 10%.
19:42 So, you know, when you don't require a fund as a lump sum
19:44 and you just need the money to SWP route,
19:47 the right thing to do is that for the first year,
19:49 he can just keep 3, 3,000,000 rupees,
19:51 which is like if he wants to have a 6% withdrawal
19:54 or 7% withdrawal on 50,000,000 rupees,
19:55 he can have that money in his liquid or arbitrage fund.
19:59 And balance, he can participate
20:00 in a balance advantage fund
20:03 or balance or large cap index funds.
20:05 That's what he can do.
20:06 And then from second year onward,
20:08 he can have his SWP going
20:10 rather than just starting from first year onwards.
20:12 So one year gap more he can give from here onwards
20:15 as markets are at all time high.
20:17 And I'm sure that we are heading for some spectacular,
20:21 you know, market rally next 10 years time,
20:23 but it's never linear.
20:25 So, and it's a very short timeframe
20:28 in which he's looking at starting his SWP.
20:31 So the amount that you require for next one to two years,
20:33 he can just park that fund in a arbitrage fund,
20:37 but rather than having a multi-asset fund,
20:40 I will, in personal,
20:41 maybe I would like to have more
20:42 of a balance advantage fund
20:44 or let's say a large cap index fund to do my SWP.
20:47 And balance also fund,
20:48 if he has some funds remaining on his side,
20:50 he should participate in a large cap-ish
20:52 or a debt mutual fund.
20:54 This is what I do because
20:56 with a mix of balance advantage fund, large cap fund,
21:00 he can target a return of 10 to 11% on overall corpus
21:03 and he can have a withdrawal of 6%
21:04 going easily from his portfolio for SWP.
21:08 - Well, in any case, enjoy your retirement.
21:10 Just about a year to go, you know,
21:13 so I'm sure you're looking forward to it.
21:15 All right, next query from Vikas, who's age 49,
21:19 who says, "I've been investing in four small cap funds
21:22 "for the past five years
21:23 "and I've booked some profits in '21 and '23.
21:25 "I'm still sitting at a profit of approximately 100%
21:29 "in all these schemes."
21:30 Good for you, Vikas.
21:31 "Should I book partial profits?
21:32 "If yes, where should I reinvest
21:34 "or should I continue my SIPs?"
21:37 He goes on with details of his current SIPs
21:39 for paucity of time,
21:40 so I'm just putting them on the screen.
21:42 Juzair, would you like to take this question?
21:45 - So first of all, I feel that, you know,
21:48 a mutual fund investment is not like a stock investment,
21:51 you know, so your mutual fund investment
21:53 should be more goal-oriented.
21:54 And frankly, he, you know, by booking profits in '21 and '23,
22:01 he missed the whole small cap rally
22:04 of the '23, '24 financial year,
22:06 in terms of, you know,
22:08 and he landed up paying capital gains tax.
22:10 And so, ideally, any of your mutual fund investments,
22:14 you know, specifically when you're doing SIP,
22:16 it should be more goal-oriented.
22:18 It should not be from a purpose of, you know,
22:20 trying to jump around from one scheme to the another scheme,
22:23 because you need to understand
22:25 that you are paying a transaction cost, right?
22:27 And the transaction cost is more in terms of the taxation.
22:30 So in my opinion, he should stay put, stay invested.
22:34 And he needs to be mindful of the fact that,
22:37 by he's done a SIP for five years,
22:40 but logically his investment time
22:42 has only been two and a half years,
22:44 because his first installment has gone five years back.
22:48 And one installment has gone even as late as just
22:50 maybe a month back.
22:52 So when you take the average of, you know, 60 months,
22:55 his average investment has just been, you know,
22:57 two and a half years.
22:59 So that is something which he needs to be mindful of.
23:02 Ideally, the time horizon for a SIP,
23:04 we talk about in terms of 15 years.
23:06 Markets will be going up and down.
23:08 Trying to time the market is not, you know,
23:14 an advisable strategy.
23:15 - Right.
23:16 - A mutual fund, leave it to the fund manager
23:18 to do the booking of the profits, you know.
23:21 A mutual fund doesn't become expensive or cheap like a stock.
23:24 - So net, net, you're saying continue your SIP.
23:27 - Yes, absolutely.
23:28 And hold on, not to exit.
23:30 - Okay, don't exit, continue your SIP.
23:32 That's the advice coming in from Juzair.
23:34 That's all the time we have,
23:35 but you know where to get in touch with us.
23:36 Those numbers on your screen.
23:38 For today, Shruthi and Juzair,
23:39 thank you so much for joining us
23:40 and to all of our viewers as well.
23:43 We'll be back tomorrow, same time, same place.
23:45 Meanwhile, thank you for watching,
23:47 but do stay tuned, a lot more coming up on NDTV Profit.
23:50 (upbeat music)
23:54 (upbeat music)
23:56 (dramatic music)
23:59 [MUSIC PLAYING]
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