Unfortunately in India we don't have a very prominent social security scheme, which takes care of you in your retirement days by paying a steady pension. Over your entire work life you ideally have to save money to make sure your standard of living does not drop post retirement when your active income stops. The biggest requirement when you retire is to generate a regular income from the corpus accumulated till retirement, enough to meet your monthly living expenses considering inflation.

For most investors the obvious choice is fixed deposit, company deposit or small saving schemes. This category of investment, however, has its own disadvantages when it comes to taxation, falling interest rates & liquidity in case of some emergency. The interest income is added to the individual's income and taxed at a marginal rate in which the individual falls, therefore eating into the already low returns even further and unable to protect the investor from the effects of inflation. I wrote about the same in more detail in my last article.

Is there a better alternative available to the investors where the product can be matched to the investors risk profile and generate regular, tax efficient cash flows for an extended period? Yes, systematic withdrawal plan, popularly known as SWPs, in mutual funds.

Firstly, SWP is not a type of fund but an option available in the fund. So depending on your risk profile a fund can be chosen, ideally in the growth option and apply the SWP to it. The table below explains the impact of a monthly SWP from the growth option of a debt fund.

If we observe the table carefully, the cumulative tax liability over the first three years result in an average 3.48 percent Short Term Capital Gains Tax (STCG), which is an effective 7.25 percent, post tax return v/s roughly 5.25 percent in a Fixed Deposit offering 7.5 percent return to the same investor in the 30 percent tax bracket. For the fourth year when the effect of indexation sets in, the investors tax liability would fall to 2.15 percent and hence an effective post tax return of roughly 7.34 percent.

Here the investor does not only save heavily on taxation v/s the traditional products but also his invested capital can grow over time like we see in the above table at Rs 10,32,326.60 at the end of the fourth year.

A note of caution here is that the actual outcome may differ from the one illustrated above, with the greatest risk being in the returns generated by the scheme, some would have exit load and hence it is extremely important to select the right scheme for the said goal and also moderating our expectations.