What is SWP? How it works?

What is a Systematic Withdrawal Plan?

Systematic Withdrawal Plan is used to redeem your investment from a mutual fund scheme in a phased manner. Unlike lump-sum withdrawals, SWP enables you to withdraw money in installments. It can be viewed as the opposite of SIP. In SIP, you channelize your bank account savings into the preferred mutual fund scheme. Whereas in SWP, you channelize your investments from the scheme to the savings bank account. It is one of the strategies to deal with market fluctuations.

With the Systematic Withdrawal Plan, you can customize the cash flow as per your requirement. You can choose to either withdraw just the capital gains on your investment or a fixed amount. This way you will not only have your money still invested in the scheme, but you will also be able to access regular income and returns. The money that you withdraw can be used to reinvest in some other fund or can be retained by you in the form of cash.

Types of SWP –

There are 2 types of SWP

  1. Fixed SWP – where a fixed sum is withdrawn from the mutual fund on the set date, irrespective of the fund’s performance, hence, this method can erode your capital when the fund has not performed very well.
  2. Appreciation SWP – where only the gains (appreciation) that have happened in the scheme are redeemed on the set SWP date. Avoiding erosion of capital but can lead to erratic numbers each month.

How does SWP work?

An SWP gives surety of a stable payout to the investors at predetermined intervals. This implies that at some stage the investments will be completely repaid along with the gains in the hand of a mutual fund investor.

Hence, an investor is assured of getting a fixed amount at his/her pre-determined frequency through an SWP.

  • If the fund’s performance is good, the SWP will last longer.
  • If the performance is poor, it’ll finish sooner.
  • If your annual withdrawal is less than what the fund generates every year, you can continue earning from this mutual fund forever.

Why do I need to set up an SWP?

  • Manage the market risk  – SWP like SIP helps you to reduce your market volatility risk by averaging your return over a period of time. If you withdraw/deposit lumpsum amount at a given point of time, you are bearing the risk of markets going up or down after that. Through SWP, you are distributing it over a period of time. Where the markets are up, you make higher gains and vice versa. SWP is automatically doing that for you, you do not have to keep a continuous tab on the market.

Just as Systematic Investment Plans (SIP) avoid market risk at the time of investment, SWPs lower market risk at the time of redemption.

  • Regular Income for your family on retirement or otherwise – For retirees with huge corpus and need for regular income, SWP is a great option. Through this, the retirees can invest in mutual funds and set up SWP  equivalent to the amount they need each month for their regular expenses.
  • The second stream of income – For someone who wants additional income each month and has a large corpus that they have invested. SWP can work as a good option.
  • Reduced Taxation as compared to the dividend option – the redemption from SWP is taxable based on the mutual fund – debt or equity. Each SWP gains are taxable. However, even the dividends that you shall receive from the dividend option mutual funds are taxable. Hence, it is important to consider the tax impact before taking an investment decision.

Spreading investment over the right time period is the key. The STP can be done over a time period of three to four months or across several years. Investors are frequently at a loss as to how many monthly installments to break up the investments into. Since there is no underlying inflow as in the case of a salary that feeds a SIP, this is entirely at the discretion of the investor.

Consider the example of someone who came into R20 lakh in December 2007 and then invested it all in an equity fund. In four months, the money would be reduced to less than R10 lakh. In some cases, funds could have gone down to R5 or 6 lakh. After taking such a big hit, a person may never invest again. It will take about six years for him to break even. However, suppose this investor had invested gradually over 12 months. In that case, only about a tenth of the money would lose a lot of its value. Overall, averaging over a year, the acquisition cost would be such that the investment would hardly ever be in a loss. Of course, I’ve taken an extreme example to illustrate the concept, one that takes the investor from an all-time high peak to a low point. You could have started a little earlier, say in 2006 and then spread the investment over a longer period.

However, if you actually look back at the markets over the last decade, you will realize that while an STP generally helps one avoid a market peak and average costs, they are not a foolproof device.

Equity is equity and there’s no way of doing away all risks. However, based on what has happened over the last two decades in India, stretching an investment over two to three years is likely to capture enough of a market cycle to significantly reduce risk.

An Example of SWP

You have a corpus of INR 3 lakhs that you have decided to invest in a debt mutual fund and set up SWP of INR 10,000 each month. SWP of INR 10,000 will be redeemed from the mutual fund each month on the set date and that money will be transferred to your bank account. After the redemption, the balance amount in the mutual fund will be invested to grow.

Wealth Cafe Actionable – SWP works better when a person has invested and accumulated a significant sum (with respect to the withdrawal one is seeking). In a small investment, if the return generated is less than the regular payouts, it will fast erode capital. Also, when the markets are doing good, SWP will erode your capital and your invested amount will be redeemed. Balanced Funds are a good option to invest in while doing an SWP as it is taxed like a debt mutual fund but has 35% equity to help the corpus grow faster.



Things to check in your Mutual Fund Account Statement?

A mutual fund statement is pretty much like your bank account statement. It is a complete summary of your mutual fund investments. While formats and layouts may vary across fund houses, the basic components remain the same.

The account statement is emailed to you occasionally or you can download the same from the respective Asset Management Company’s (AMC) website. You will have to go to the AMC (mutual fund company) website and register yourself if you have made investments from other aggregators. It is important to know that in spite of making investments from any source, you can always access the same on their website and sell/buy more from there.

The account statement looks like this:

1. Keep a record of your folio number. It is your reference number for the investment made. Each time you make an additional investment in an AMC, ensure that the folio number is the same. This will make it easier to track all your fund investments with a particular fund house. If you don’t use the same folio number, you will have many folio numbers over time and this will make tracking your investments difficult.

2. Ensure that the name of the bank and the account number are correct to avoid facing problems at the time of redemption.

3. Make sure you are KYC compliant and have made your FATCA declaration. FATCA is a US law and as per an India-US treaty, Indian fund investors have to declare if they are US citizens or not.

4. If you have invested through an agent, his/her name code and EUIN number will appear in the account statement. Take a note of it.

5. See your transaction summary. This section mentions the types of transactions that you have opted for, which also include purchase, SIPs, SWPs, etc.

6. Check the NAV date on your account statement. If you invest before 12 pm,  then same days NAV is used, if you invest around 3 pm, it is possible that your investments would be made on the following date. Hence, you must verify the same.

6. Understand your load structure. It gives you details about the entry and exit cost of your investment.

A fund statement is generated within two to three days of your investment in a particular scheme. You receive it within seven to ten working days if you have opted for a physical copy or in three to four working days on your registered email address. If you have not received one, you can always get in touch with the AMC that is managing your fund.

Wealth Cafe Actionable – You should verify your account statements after you have made investments. It is prudent practice to save the same regularly for any future reference.


When is the right time to start your investments?

In our workshops, we have discussed with so many people who say that they are waiting for the markets to go down to start their investments or they are waiting to have enough before they start. Some may even argue to say that they want to enjoy life today and will invest tomorrow (in spite of having enough savings in their bank account). Some feel they are just waiting for the right time to start investing.

The RIGHT time to start your Investments is NOW

The best time was yesterday, but now that is gone right time is today. With every day you push to invest your money, you are reducing your money from growing and making wealth for you.

If you are following the basic rules, you will definitely get it right. It is quite usual for you to feel a bit nervous when you are investing in unfamiliar instruments for the first time. But you will learn on the way. So, don’t let your nervousness delay your investments further.

To help you understand what you are missing every time you are delaying your investment choice, we have tabulated below an example:

SIP start Age2530
SIP Stop Age3060
Investment till Age6060
SIP done for how long (in years)530
Amount Invested 25,0001,50,000
At the age of 60, returns they got22,32,12521,73,726

In the above example, Priya started at the age of 25 and invested for only 5 years, until she was 30. However, she did not withdraw her investment out until she was 60.

On the other, Shreya started her investment only at the age of 30 and continued to invest until she was 60. She invested around INR 150,000 and Priya invested around INR 25,000.

You would obviously expect Shreya to make more money than Priya. But, it is Priya who has made great returns from just an investment of INR 25,000. This is the power of starting early.

When you start your investments today, you have to invest less and you will reach your goals sooner.


It is possible that some of you may be anxious as to how should you start your investment and where to put your money. For all of you do not worry, doing a SIP for your mutual fund is a great start and we have written many blogs on how should you invest and are writing more.

Always try to match your goals with your investment choice. This will help you eliminate unwanted choices, and identify the right ones. It will also save you a lot of headaches later. As a rule, avoid risky investments like stocks, equity mutual funds for short-term goals (3 years and less than 3 years). This is because equity can be extremely risky and volatile in the short-term. You should try to preserve your capital and try to secure stable returns for short-term needs. However, if you have time in hand, you can be a little adventurous and invest in equity. It will help you earn a few extra percentages. This is because equity has the potential to give higher returns than any other asset class over a long period of time.

Don’t forget to review your investments periodically. Investing and forgetting all about it is not a great strategy. You should regularly check how your investments have done over a period of time.

Wealth Cafe Actionable – Where you are investing in Equity for long term goals, do not forget to sell your risky investments at least three years before your goal and park the proceeds in a safe avenue. This is to ensure that you have the money safely parked somewhere when you need it and the market risk will not hamper your goals. Start your investments now!!




Timing the market for your SIP investments?

Many of us keep waiting for that right time to invest.

A popular stock-market adage is Time in the market is more important than timing the market’. It may be a popular principle but unfortunately not many observe it in practice. Many people based on the basic discussions, newspaper articles or just their basic reading believe that they understand the trends of the market and start timing the market to make investments.

The curious thing about market timing is that the market almost unfailingly moves in the opposite direction to what you would expect. If you buy shares in a company thinking that ‘this’ is the right time, you are appalled by the fact that the stock starts to fall just after you buy it. Similarly, if you sell out your shares in a company because you have a strong gut feeling that it’s going to collapse, you find it racing ahead of just about everything. It must have happened to the smartest of us.

Timing the investment in Mutual Funds

If you think you are immune to this behavior just because you invest in mutual funds rather than directly in stocks, you are mistaken. Mutual funds investors frequently try to time their systematic investments in response to the market’s ups and downs. When the market is falling, they stop their SIPs. When it is rising, they increase their SIP amounts. This invariably backfires.

SIPs work best when the markets are volatile. When the markets are high, you buy fewer units of your mutual funds through SIPs. When the markets are down, you buy more units for the same amount. This enables you to average your investment cost over time. But if you stop SIPs when the markets are down, you miss out on lowering your total investment cost. And if you increase your SIP amounts when the markets are on the rise, you keep averaging your overall cost upwards.

Now you may say that the solution to this problem is to do just the opposite: stop with SIPs when the markets are rising and increase the SIP amounts when they are falling. Unfortunately, timing the market in this manner is just as unfruitful. First, it is counter-intuitive. Many investors will have difficulty in carrying through their decision to invest when the markets are down and sell when they are up. And second, you can never really know how long the market may keep going up or falling. All in all, it’s quite unproductive to time the market.

How SIP Works to make the most of the market trend

When the market goes down – you get more Mutual Fund units
When the market goes up- you get lesser Mutual Fund units
Hence, the SIP helps to average the cost over a period of time and makes the most of our money. We may not always know that the market is down now, we should buy more or otherwise, SIP is automatically taking care of that for us.

The beauty of SIPs is that by definition they prevent you from timing the market. SIPs are about discipline. You decide an amount and a frequency, which in most cases is monthly. Then you keep investing in the mutual fund of your choice, irrespective of where the market is. Of course, you can increase your SIP amount yearly as your pay increases but then invest it evenly till the next revision. Since the markets are volatile, you will naturally benefit from the power of rupee cost averaging, which will increase your returns.

Wealth Cafe Actionable – As we have said, SIPs is an easy way to invest your money and it on its own makes the most of the market trend. Once you have started SIP, just keep reviewing your asset allocation occasionally and let them be.


How to Invest through your Mobile Phone in a Mutual Fund?

Interbank Mobile Payments Service (IMPS) Facility: IMPS is a platform provided by National Payments Corporation of India (NPCI). IMPS allows existing unitholders to use mobile technology/instruments as a channel for accessing their bank accounts and initiating interbank fund transaction in a with convenience and in a secured manner. It allows investing 24*7 via mobile phone.

How does it work?

  • Unitholder needs to register for Mobile Banking with his Bank
  • The bank issues a unique MMID (Mobile Money Identifier) which is a combination of his bank account and bank code and also issues an M-PIN, a secret password.
  • Unitholder can now perform a transaction using a mobile banking application or SMS / USSD facility as provided by his Bank. For example: If unitholder wants to invest Rs. 10,000 in a mutual fund scheme using the mobile application, he needs to follow the following steps – In the mobile application; provide the
    • MMID of the scheme
    • His Mutual Fund Folio No.
  • Amount to Invest/transfer
  • MPIN issued by the bank remitting bank validates the details and debits the account of the Unitholder. It passes on the information to the beneficiary party (AMC in this case) via NPCI.
  • AMC shall, after validating the details, credit the folio/scheme account with the appropriate units and shall also provide an SMS/email confirmation to the Unitholder informing of the allotment

Wealth Cafe Actionable: Unitholder should ensure that the Mobile number registered with Bank for IMPS facility is the same as mobile number registered with Mutual Fund for the folio.


What you need to start and how to be KYC compliant.

Once you have decided your goals and arrived at the amount you want to invest or you have your savings in place and you just want to get investing. You will need help to understand the following things to start your mutual fund investment journey.

We have discussed what is a mutual fund and different types of mutual funds.

Here, we are going to discuss how you can actually get investing and the very basics of doing that.

This guide is going to cover the very basic questions that our trainees have asked us about starting their first Mutual Fund investment.

Things you need before you start your mutual fund investments

To start investing in a fund scheme you need

  • a PAN,
  • bank account and
  • be KYC (know your client) compliant.

The bank account should be in the name of the investor with the Magnetic Ink Character Recognition (MICR) and Indian Financial System Code (IFSC) details. These details are mentioned on every cheque leaf and it is common for an agent or distributor to seek a canceled bank cheque leaf.

How to get your KYC ?

The need for KYC is to comply with the market regulator SEBI in accordance with the Prevention of Money laundering Act, 2002 (‘PMLA’), which undergo changes from time to time.

The KYC process is investor friendly and is uniform across various SEBI regulated intermediaries in the securities market such as Mutual Funds, Portfolio Managers, Depository Participants, Stock Brokers, Venture Capital Funds, Collective Investment Schemes, and others. This way, a single KYC eliminates duplication of the KYC process across these intermediaries and makes investing more investor-friendly.

Documents required to be submitted along with KYC application

  • Recent passport size photograph
  • Proof of identities such as a copy of PAN card or UID (Aadhaar) or passport or voter ID or driving license
  • Proof of address passport or driving license or ration card or registered lease/sale agreement of residence or latest bank A/C statement or passbook or latest telephone bill (only landline) or latest electricity bill or latest gas bill, which are not older than three months.

You will need to submit copies of all these documents by self-attesting them along with originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorized for attesting the documents.

How to check your KYC status?

Given that KYC is a common process across various investment platforms. If you have submitted your documents earlier for opening a D-mat or any other investment, it may be possible that you are already KYC compliant. You can check your existing status and the application status on the following portals:

  1. National Stock Exchange
  2. CAMS Investor Services Private Limited
  4. CDSL Ventures Limited
  5. Mutual Fund Companies – you can also process your KYC with the mutual fund company. However, you have to make an investment in the mutual fund. They will not process your KYC without any investment.

Wealth Cafe Actionable – Where you are a first-time investor, it is advisable to process your KYC along with your mutual fund application. It will reduce the time that goes into the same.



How to practically invest in a mutual fund?

Mutual Fund Application form

Each mutual fund scheme has a form that investors need to fill. If you start investing in the systematic investment plan (SIP), you need to fill in two forms: one to open an account with the mutual fund and the other to specify your SIP details such as frequency, monthly installment amount, and date on which the SIP sum is to be invested.

Different ways in which you can invest in Mutual Funds

Like the many mutual fund schemes to choose from, there are several ways in which one can invest in them. One can invest online or offline or in direct as well as regular plans.

  1. Direct Plan: Since January 1, 2013, all mutual fund houses have rolled out a new plan under all of their existing fund schemes-the Direct Plan. These plans are targeted at investors who do not make their mutual fund investments through distributors and hence have a lower expense ratio compared to existing fund schemes of the AMC. This means that you, as an investor, will get an opportunity to earn a slightly higher return from your mutual fund despite it having the same portfolio. The direct plans will not charge distribution expenses or commission, resulting in these plans having lower annual charges and eventually, a different (higher) NAV compared to the regular plans. You can easily get the information about the respective mutual fund on their direct website.
  2. Mutual Fund UtilityThe MFU (Mutual Fund Utilities) is a shared platform used by all the AMCs in India. Now, the MFU has made it easier for all the mutual fund investors to manage and track their personal investments on the shared MFU platform. This can be done using the CAN (Common Account Number) service, wherein an investor needs to self-register on the MFU platform and will then be able to use their platform for tracking their own fund’s performance.
  3. CAMS KRA myCAMS is a web-based application developed by CAMS for investors to enable them to create a single login user id through CAMS website or through Mobile App Version and enable them to transact across all participating Mutual Funds who have authorized CAMS
  4. Through intermediaries: There is a wide variety of intermediaries available. These include most banks, distribution companies having a national or regional presence, some stockbrokers (including online brokers) and a large number of individuals and small financial advisory companies. All intermediaries have to be registered with the Association of Mutual Fund in India (AMFI), which also maintains a searchable online directory at The website also lists intermediaries who have been suspended for malpractice to protect investors from going back to them. The intermediary normally brings the required mutual fund application form, helps you fill the forms, submit the forms and other documents to the Mutual Fund office and sometimes even brings in the Account Statement. But, all these services come to you for a fee. Typically, agents charge a flat fee for these services.
  5. Through IFAs: IFAs are independent Financial Advisors, who are individuals who act as agents to facilitate a mutual fund investment. They help you fill the application form and also submit the same with the AMC.
  6. Directly with the AMC: You can invest in a mutual fund scheme by investing directly through the AMC. The first time you invest in any Mutual Fund, you may have to go to the AMC’s office to make your investment (because of submitting your KYC document). Subsequently, future investments in different fund schemes of the same AMC can be made online (provided this facility is offered by the AMC) or offline, using the folio number in your name. Some AMCs may extend the facility of sending an agent to help you fill the application form, collect the cheque and send the acknowledgment.
  7. Through Online Portals: There are several third-party online portals, from where you can invest in various mutual fund schemes across AMCs. Most of the portals have tie-ups with banks to facilitate easy fund transfer at the time of investing. These portals charge an initial fee to set up an account and facilitate future smooth online access to invest and redeem your investments.
  8. Through your bank: Banks are also intermediaries who distribute fund schemes of different AMCs. You can invest directly at your bank branch into fund schemes that you wish to invest in.
  9. Through Demat and Online Trading Account: If you have a demat account, you can buy and sell mutual funds schemes through this account.

Different Ways in which you can make the payment for your Mutual Funds

Cheque – You can draw a cheque in the name of the Mutual Fund AMC along with the exact scheme name and deposit with the mutual fund application form with the mutual fund company office or other agents/intermediaries – depending upon the option you are selecting to invest your money in.

Electronic Money Transfer
The traditional way to transfer money from one bank account to another is to write a cheque and then deposit it. The advent of technology has ensured that one need not go through such a tedious process anymore. Over the years, the RBI has introduced several steps that have resulted in the paperless transfer of funds through electronic funds transfer (EFT). There are several other acronyms that one comes across, especially when transferring funds online or through electronic clearances such as RTGS, NEFT, IMPS, and ECS. Each of these plays an important role in ensuring your investments are timely and you do not lose time when investing. Each of these options plays a role in the way your investments are treated in a mutual fund.

Electronic Clearing Service (ECS): ECS is an electronic mode of payment or receipt for transactions that are repetitive and periodic in nature. For this reason, ECS is most preferred and useful when investing through SIP. Essentially, ECS facilitates the bulk transfer of money from one bank account to many bank accounts or vice versa. Primarily, there are two variants of ECS-ECS Credit and ECS Debit. ECS Credit is used by an institution for affording credit to a large number of beneficiaries having accounts with bank branches at various locations within the jurisdiction of an ECS Centre by raising a single debit to the bank account of the user institution.

ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.ECS Debit is used by an institution for raising debits to a large number of accounts maintained with bank branches at various locations within the jurisdiction of an ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of mutual fund SIPs because these are periodic or repetitive in nature and payable to the user institution by a large number of investors.

National Electronic Fund Transfer (NEFT): This is a nationwide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals who do not have a bank account (walk-in customers) can also deposit cash (up to R50,000) at the NEFT-enabled branches with instructions to transfer funds using NEFT. At present, NEFT operates in hourly batches – there are twelve settlements from 8 AM to 7 PM on weekdays and six settlements from 8 AM to 1 PM on working Saturdays.

Electronic Funds Transfer (EFT): This is a paperless method by which money is transferred from one bank account to another bank account without the cheque or currency notes. The transaction is done at bank ATM or using Credit Card or Debit card. In the RBI-EFT system, you need to authorize the bank to transfer money from your bank account to other bank accounts that are called a beneficiary account. Funds transfers using this service can be made from any branch of a bank to any other branch of any bank, both inter-city and intra-city. RBI remains intermediary between the sender’s bank called as remitting bank and the receiving bank and affects the transfer of funds. Using this method, funds are credited into the receiver’s account either on the same day or within a maximum period of four days, depending upon the time at which the EFT instructions are given and the city in which the beneficiary account is located. Usually, the transactions done in the first half of the day will get first priority of transfer than the transaction done in the second half.

Real Time Gross Settlement (RTGS): The real-time gross settlement is an instantaneous funds-transfer system, wherein the money is transferred in real time. With this system, you can transfer money to other bank accounts within two hours. In this system, there is a limit that you have to transfer money only above Rs2 lakh and for money below Rs 2 lakh transactions, banks are instructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used for high-value clearing. The RTGS facility is available only up to 4:30 PM on weekdays and up to 2:00 PM on working Saturdays.

Interbank Mobile Payments Service (IMPS) Facility: IMPS is a platform provided by National Payments Corporation of India (NPCI). IMPS allows existing unitholders to use mobile technology/instruments as a channel for accessing their bank accounts and initiating interbank fund transaction in a with convenience and in a secured manner. It allows investing 24*7 via mobile phone.

Wealth Cafe Actionable – There are many options and ways to invest in a mutual fund. If you have the expertise to select a scheme by yourself then go for a direct option or CAMS KRA to invest directly in the scheme. Where you going through an intermediary to invest in a Mutual Fund, you must always understand their basis of selecting a particular scheme for you and review the same at your end before finalizing the option they have selected for you.


Why should you do a SIP?

Systematic Investment Plan (SIP) as we know it, has become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising since they have so many advantages: Become a Disciplined Investor A SIP helps you to discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the pre determined date. This ensures that money does not lie in your savings account at a meagre 3.5% and there is no temptation to spend that amount as it is not there to spend. Rupee Cost Averaging Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able to do it consistently. When experts have failed, the rookie investors will obviously not be able to gain much. It is a useless activity, even attempting to time the increasing volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out. The timeless principle is “Buy Low Sell High”. However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help overcome this problem.
                                                                   Bit by Bit, you can grow your fortune
Achieve your Financial Goals Your future financial goals like buying a car, buying a house, a child’s education can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments. Compounding Benefits The biggest advantage of regular long term investments, compounding benefits. The investments made continue to grow year on year and the invested profits participate in growth in future years. Effortless Investments Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction, the SIP can be stopped at anytime. The convenience, returns and all the other benefits of SIPs have made SIPs the most preferred and the favoured form of investments. If you still have any questions, you can ask the same in the comment section below.

Annualised Return and CAGR

Annualized return and CAGR are not technically the same thing. They refer to the returns on various investment options computed on per annum basis. All long term investments multiply by your wealth by compounding.

Where investment has grown at different rates over a few years, CAGR is the formula used to define the number at which the investment has grown year on year.

Compounded Annual Growth Rate (CAGR) shows how much a person’s investment grew in one year. In other words, it is the average returns an investor earns on his investments after one year. The bank or the financial institution calculates this rate in terms of annual percentage.

How to calculate CAGR?

To calculate CAGR, you must know the following:

  1. The investment made in the initial year (the year of investment)
  2. Amount invested in the current year and
  3. Tenure of investments

CAGR = [(End value/beginning value)^(1/year)] – 1


For example, you bought a stock for ₹100 in 2015. It appreciated by 25% to ₹125 in the year 2016 and further appreciated to ₹150 in the year 2017. Therefore, the appreciation in the rate from 2015 to 2017 was 20%.

If you want to know the growth rate of your investments for the complete period of time, use CAGR. If we put the above values in the formula, Compound Annual Growth Rate for your investment between 2015 and 2017 will be 14.47%.

Mutual Funds/Equity and CAGR

Return on any investment is discussed in terms of CAGR. Especially, in case of equity and mutual fund investments. When you invest in mutual funds, the return that is shown in CAS statements and your Dmat statements are in CAGR.

This is because the actual return % on mutual funds is dependent on the movement in the stock market which keeps changing. It never grows or falls at a fixed rate.

Hence, it could be possible that an investment in mutual fund grew at the rate of 20% in year 1, 30% in year 2, 10% in year 3. In such a case, it becomes very difficult to discuss the actual gains. This is when and why CAGR is used in market-related variable returns investments.

In our Article, how to set goals, we have discussed the expected returns on various asset classes, we are always talking about CAGR.

Wealth Cafe Note:

  1. CAGR is an average rate. Hence, if a CAGR is of 15% of an investment made for 4 years. It could be possible that the first 3 years have 30% gains and the next 2 years lower gains.
  2. The gains are not distributed evenly over the period of investments. One must stay invested for the right time based on the asset class to benefit the most.
  3. CAGR is different from absolute returns and year-on-year gains.
  4. There is a chance that two investments may reflect the same CAGR, with one being more lucrative than the other. This could be because the growth was faster in the initial year for one, while the growth happened in the last year for the other.
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Mutual Funds Taxation

Income-tax on Long term gains made from mutual fund investments was introduced in the budget last year. It is very important to know how your mutual fund gains are taxed and report correct numbers in your returns.

3 Factors that determine the Mutual Fund Taxation

Any fund which invests 65% or more in equity is called as Equity Fund. For example, large-cap funds, multi-cap funds, small and mid-cap funds or equity-oriented balanced funds (where the equity exposure is 65% or more) are all called equity-oriented funds.

If the equity portion is less than that, then they are all treated as debt funds or non-equity funds. For example liquid funds, ultra-short term funds, short-term funds, income funds, gilt funds, debt-oriented balanced funds, gold funds, fund of funds or money market funds.

  • Holding periods of Investment–

The holding period for Equity and Debt Funds will be different for taxation purpose.

STCGIf the holding period is less than or equal to 12 monthsIf the holding period is less than or equal to 36 months
LTCGIf the holding period is more than 12 monthsIf the holding period is more than 36 months.

Mutual Fund Taxation FY 2018-19 -Capital Gain Tax Rates

Now that you have clarity on what is Short term capital gains (STCG) and Long term Capital gains (LTCG). Let us move further and understand the Capital Gain Taxation for mutual fund investors.

The biggest change from FY 2018-19 is the introduction of LTCG in Budget 2018. The table below will give you a brief of the same:

 Note: Surcharge @ 15%, is applicable where the income of Individual/HUF unit holders exceeds Rs. 1 crore. Also, surcharge @10% to be levied in case of individual/ HUF unitholders where the income of such unitholders exceeds Rs.50 lakhs but does not exceed Rs.1 Cr. Further, Health and Education Cess @ 4% will continue to apply on the aggregate of tax and surcharge.

Where an individual/HUF total income (income from all sources) is less than the slab rate, then any income from long term or short term is a part of the slab rates.

Short Term Capital Gains on Equity Mutual funds/Equity Shares

Cost price of MF (10,000*100)1 January 201810,00,000
Selling price (10,000*120)31 March 201812,00,000
Tax payable (15%)30,000

Note: There is no change in the STCG with the new amendment. STCG remains taxable as it always was. It is to be computed based on the equity or debt fund. There is no impact of 31 January 2018, cut off dates prices for STCG.

Long term Capital Gains on Equity Mutual funds

There is a cut-off date of 31 January 2018, which has been introduced for the purpose of computing LTCG. LTCG is to be computed in 2 parts:

  • Units purchased on or  before 31 January 2018
  • Units purchased post 31 January 2018

Gains up to Rs. 1,00,000 is exempt while computing LTCG from equity-oriented mutual funds or shares.

Long term Capital gains on mutual funds purchased before 31 January 2018 and sold after 12 months.

There was a benefit introduced to investors by considering the cost on 31 January 2018 for the purpose of computing LTCG. However, this method can be a bit confusing so you may take expert advice. We have described the same below for your understanding:

The Cost to be considered :

Higher of Actual cost or (the formula amount)

The Formula Amount is Lower of

  • The highest price of the unit on 31 January 2018 from all recognized stock exchange.
  • Actual Selling Price

For Example:

Date of buying – 1 April 2017

Date of selling – 31 April 2018

Number of Units – 10,000

Price of  MF on following Dates

Sr. NoDatesPrice
1Date of buying (1 April 2017) – Actual Cost100
231 January 2018 (highest price on cut-off date)150
3Date of selling ( 30 April 2018)120

Step 1 – Calculate the Formula Amount i.e. Lower of (2) and (3) i.e. 120 (lower of 150 or 120)

Step 2 – Calculate the cost to be considered i.e. higher of (1) or Step 1 answer – 120 (higher of 100 0r 120)


Cost price of MF (10,000*120)12,00,000
Selling price (10,000*120)12,00,000
LTCG (10%)Nil

Things to Note:

  • Comparison of prices on 31 January 2018 is done to compute the considered cost price.
  • The highest price of the MF/share as on 31 January 2018 is to be considered for this calculation.
  • Final selling price is the lower of 31 January price or the price on the selling date.
  • Hence, this cost determination method may lead to nil gains, benefitting the investor.
  • The gains will not be Nil in all the cases.
  • This method will never lead to a long term capital loss for an individual/HUF.

Long term Capital Gains on mutual funds purchased after1 February 2018

No comparison of prices as on 31 January is required. However, the exemption limit of Rs. 1,00,000 is available.

Cost price of MF (10,000*100)1 February 201810,00,000
Selling price (10,000*120)10 February 201912,00,000
LTCG (10%)20,000

TAX – Savings Equity Mutual Funds

Equity Linked Savings Schemes or tax saving mutual funds are one of the most sort out for financial products under section 80 C of the Income-tax Act, 1961.

ELSS comes up with a lock-in period of 3 years. It means that once you invest in ELSS, you cannot redeem your units before the expiration of 3 years. You can claim a tax deduction of up to Rs 1.5 lakhs and save taxes up to Rs 45,000 by investing in ELSS.

Upon redemption after 3 years, the long-term capital gains (LTCG) up to Rs 1 lakh are tax-free in your hands.  LTCG in excess of Rs 1 lakh is taxed at the rate of 10% without the benefit.

You can read about various ways to save taxes under section 80 C in out Article – How to save tax?

Note: It is not compulsory to redeem ELSS mutual funds after 3 years. You can stay invested for a longer duration. To maintain the 80C benefit, you must stay invested for 3 years.

Mutual Fund Taxation FY 2018-19 – Dividend Distribution Tax (DDT)

There are few investors who opt for dividend option in mutual funds. Hence, let us see the taxation on the dividend of such funds. Earlier there was no DDT for equity investors. However, from the Budget 2018, DDT @10% will be applicable to equity investors also.

Base Tax RateSurcharge and CessTotal Tax
Equity Oriented SchemesNilNilNil
Debt Oriented SchemesNilNilNil


Tax Payable by Mutual Fund Companies

Equity Oriented Schemes10%12% SC + 4% cess11.648%
Money Market/Liquid Schemes/debt funds25%12% SC + 4% cess29.12%
Infrastructure Debt Fund25%12% SC + 4% cess29.12%

Note: In spite of the 10% long term tax now payable on mutual fund investments. It is a very good form of investments and the gains made are far more to compensate the taxes to be payable on the Long term. However, it is advisable to get your returns working reviewed by an expert where you have a lot of equity/ mutual funds gains in a particular FY.

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