A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What is the Systematic Withdrawal Plan (SWP)?
Some people invest in mutual funds for a regular income and usually look for options to get a dividend. So many schemes, especially debt-oriented schemes, have monthly or quarterly dividend options. It is important to note that dividends are distributed from the profits or earnings made by the scheme and are in no way guaranteed each month. Although the house of the fund strives to give consistent dividends, the distributable surplus is determined by market movements and the performance of the fund.
There is another method of obtaining a monthly income – using the systematic withdrawal plan (SWP). Here, you need to invest in the growth plan of a scheme and specify a certain fixed amount required as a monthly payment. Then, on a designated date, units equal to that fixed amount would be refunded. For example, an investor might invest Rs. 10 lacs and request that Rs. 10,000 be paid on the 1st of each month. Thus, units worth Rs. 10,000 would be redeemed on the 1st of each month.
It is important to note that the tax treatment for both, dividends and SWPs, varies and investors need to plan accordingly.
*Monthly income is not insured and should not be construed as a guarantee of future returns.