A common misunderstanding among SIP investors is that taking out money means stopping the SIP. It does not. The SIP and the money that has built up are two things. You can take out some of the money without affecting the payments.
The withdrawal is done in parts. Only the units you decide to take out are sold. The other units stay in the investment. Keep growing with the fund.
how partial withdrawal works
When you ask to take out some of your investment you say how money or how many units you want. The fund manager sells that part of your investment. Sends the money to your bank account.
The SIP is not affected. If you are supposed to pay week that payment still happens. The payment plan is still active and future payments keep happening at the rate.
This is different from stopping the SIP, which only stops payments. It is also different from taking out all of your investment, which ends the investment.
the FIFO rule and how it affects your withdrawal
Mutual funds use the First In, First Out method when you take out money. The units you bought first are taken out first.
This matters because each payment in the SIP has its time in the fund. A SIP that has been going for three years has units: some that have been in the fund for more than 24 months some for 12 to 24 months and some for less than a year. When you take out some of the units the oldest ones go first.
The result is that a partial withdrawal often leads to a mix of term and short-term gains depending on how old the units are.
the tax treatment on partial withdrawal
For funds that invest in stocks the tax depends on how long the units have been held.
Units held for than 12 months have a tax of 12.5% with an exemption of ₹1.25 lakh per year on all long-term gains. Units held for 12 months or less have a tax of 20%.
Because FIFO applies the oldest units are taken out first. If you started your SIP than a year ago the first payments are likely long-term. Newer payments are term and only taken out when the older ones are gone.
For debt funds bought on. After 1 April 2023 the tax is based on your income tax rate regardless of how long you held the units.
what to check before making the request
Exit load. If the units you are taking out are still in the period when a fee applies you will be charged. For equity funds this is usually 1% if you take out within a year. Because FIFO applies the oldest units may already be out of the fee period even if the SIP itself is less than a year old.
Cut-off time. If you submit the request before the cut-off time ( 3:00 PM for equity funds) it is processed at that day’s rate. If you submit after it is processed at the day’s rate.
Bank details. The money is sent to the bank account linked to your investment. If your bank details have changed, updating them before the request avoids problems.
the compounding consideration
Taking out some of your investment reduces the amount that stays in the fund. The units you take out no longer grow with the fund. Over time this can change how much the investment is worth.
Experts usually suggest using withdrawals only when necessary, not for regular money needs. If the money is needed for a time stopping the SIP may be better than taking out money.
what retail investors should take from this
The SIP and the money you have built up are separate. Stopping the SIP does not mean you have to take out money. Taking out money does not mean you have to stop the SIP.
A partial withdrawal happens using FIFO, which means the oldest units are taken out first. This affects the fee and the tax as older units are more likely to be term.
The decision to take out money should be based on need, not on the market. The SIP keeps going. What changes is how much money stays invested.
FAQs
1. Can I take out some of my SIP investment. Still keep the SIP going?
Yes. A partial withdrawal sells the units you want. The rest stay in the investment. The SIP continues without any change.
2. How does FIFO work when I take out some of my SIP?
FIFO means the units you bought first are taken out first. Each payment in the SIP has its time in the fund so the oldest units are sold first.
3. What is the tax when I take out some of my SIP?
For equity funds units held than 12 months are taxed at 12.5% after a ₹1.25 lakh exemption. Units held 12 months or less are taxed at 20%. Debt funds bought on. After 1 April 2023 are taxed at your income rate.
4. Do I pay a fee when I take out some of my investment?
It depends on how the units you are taking out have been in the fund. If the oldest units are past the fee period you do not pay. If they are still in the fee period the fee is taken from the money you get.
5. Does a partial withdrawal change the amount I pay each month?
No. The amount and the schedule of your payments stay the same. A partial withdrawal only changes how units you have, in the fund.
