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Systematic withdrawal plans may help reduce tax burden

Systematic withdrawal plans may help reduce tax burden
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First Published: Sun, May 01 2011. 09 29 PM IST
Updated: Sun, May 01 2011. 09 29 PM IST
I am 34 years old. How much should I invest monthly through a systematic investment plan (SIP)? What kind of asset mix should I have between equity and debt? Suggest some funds.
—Bablu Bhardwaj
The amount of money to invest via SIP should be determined by your capacity to save every month. First, you should ensure that you have adequate life and health insurance. Second, enough money should be set aside to meet any emergency (typically three months’ income). After this, you should look at your monthly budget to arrive at a figure that you would be comfortable setting aside for the long term.
The asset mix for your SIP portfolio will depend on the time frame for your investment—by when you think you will need to start withdrawing the money. The longer the term, the more aggressive you can get with the amount of equity in your portfolio. An aggressive portfolio for the very long term would have about 80% allocation to equity schemes and the remaining 20% in either or both debt and gold funds.
Scheme choices can be made from the Mint50 list of recommended mutual fund schemes. Once you make your choices and invest, remember to track the performance on a monthly basis and to review and rebalance your portfolio once a year.
I invested for two years in five mutual funds through SIPs. Now the value is around Rs 2.4 lakh. I have stopped paying from January. I will need money for my sister’s marriage by the end of this year. What would be the right time for me to redeem the amount and what should I keep in mind?
—Divash Singh
The best way to redeem funds from your investment is to do it systematically, just as you invested systematically. You can do it by setting up a systematic withdrawal plan (SWP) from your schemes.
There are two advantages to this. One, you average the net asset value (NAV) of withdrawal across market conditions. In other words, you avoid trying to time the market for peak NAVs, which could be a hit or miss proposition. Second, you minimize the amount of exit load you pay for withdrawal. Since you stopped your SIP earlier this year, the final year of SIP instalments that you made would still be subject to exit load right now. However, if you start withdrawing in equal instalments, by virtue of the first-in-first-out method of redemption, you will start by withdrawing the oldest units in the folio which would no longer be subject to exit loads.
Also, a larger part of your capital gains from your withdrawals would be treated as long-term gains (holding period of more than one year), reducing the tax burden.
Queries and views at
mintmoney@livemint.com
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First Published: Sun, May 01 2011. 09 29 PM IST