There are two popular methods of investment in mutual funds. You can either invest a lump sum amount in your mutual fund scheme or opt for a Systematic Investment Plan (SIP). A SIP allows you to make small investments in your mutual fund scheme at regular intervals.
In a similar way, you can withdraw your funds as a lump sum amount or through a Systematic Withdrawal Plan (SWP). If you have built a huge corpus during the initial period of your mutual fund, you can opt for a SWP to get fixed returns.
Read on for answers to the question, “What is an SWP?”, and to learn how it works.
An SWP is a redemption strategy for mutual funds that allows you to withdraw in a planned and regular manner. Under this strategy, you can choose how much money is withdrawn in every instalment.
In addition to this, you can also select the frequency of these withdrawals, which can be quarterly, bi-monthly, monthly, or even weekly. Once you have completed the setup of your SWP scheme, it will redeem the units amounting to the determined SWP amount and credit it to your bank account.
In this way, SWP investments are entirely opposite to SIP plans. The best part is that the SWP does not require you to sell your investment all at once. Instead, it withdraws periodically, and it protects you from losing out on returns if the fund is performing poorly at the time.
When you opt for a systematic withdrawal plan, it affects your holdings in your mutual fund account. Here, units are redeemed regularly from your mutual fund account and the corpus of your fund depletes over time.
You can understand this with an example. Assume that you have invested in 4,000 units of a fund that amount to ₹10 Lakhs. If you opt for a systematic withdrawal plan, you can choose to receive a regular income of ₹10,000 through it.
In the first month, the NAV of your fund may be ₹25. This means that 400 units of your funds will be redeemed to provide you with a withdrawal amount of ₹10,000. This would bring down the total units in your mutual funds to 3,600 and reduce its total value.
This process goes on until you decide to stop, and you will keep getting the amount you want, based on your units.
The following are the perks of opting for a systematic withdrawal plan:
Regular Income: SWP scheme allows you to access regular income by redeeming the units in your mutual funds, making it a preferable strategy for retired personnel
Flexible Withdrawals: This withdrawal strategy also offers you a high degree of flexibility in choosing the withdrawal amount as well as the frequency of withdrawals
Tax Benefits: If you withdraw money from mutual funds through the SWP strategy, you do not have to pay the Tax Deducted at Source (TDS)
Minimal Market Risk: If you withdraw money through the SWP scheme at regular interest, it mitigates a lot of the market risks
Rupee-Cost Averaging: With systematic investment or withdrawal plans, you get to enjoy the benefits of rupee-cost averaging as you withdraw periodically
A systematic withdrawal plan may be best for you if you want to redeem your funds at regular intervals. This can help you earn higher returns in the future if the fund is performing poorly at a given time.
Moreover, this withdrawal strategy is ideal for retired personnel as this regular income can complement their pension to cover their expenses.
In conclusion, SWP plans are potent tools for savings which may be more favourable to you if you need the periodical inflow. Keep in mind that it does require you to invest a larger sum at the start, which is why many retirees opt for it.
Since withdrawal requires the selling of securities in your possession, the transaction will be taxed as income. Hence, it is crucial to consider the tax structure and your tax liabilities before you decide to opt for a systematic withdrawal plan. On Bajaj Markets, you can also make use of the SIP Calculator and Lumpsum Calculator to estimate the returns you could earn on your mutual fund investment.
If the Net Asset Value (NAV) of your mutual fund is low, more units of your invested fund will be redeemed. This can deplete your funds much more quickly. Hence, it is essential to opt for an SWP scheme that has a stable NAV.
It is also advisable to opt for this withdrawal strategy for liquid funds, overnight funds, or money market funds.
First of all, you must consider opting for an SWP plan only for funds that are liquid and not for ones whose NAV is highly volatile. Secondly, you must choose this withdrawal strategy if you have already built a huge corpus. A smaller corpus is better invested via the SIP or the lump sum route.
To supplement your pension, you can opt for a SWP strategy, as it allows you to receive a fixed income to cover your expenses.
There are two reasons why a SWP scheme can be a good investment/redemption strategy for you. Firstly, redemptions made on your mutual funds through the SWP plan do not attract any Tax Deducted at Source (TDS).
Secondly, a systematic withdrawal plan also enables you to withdraw only your gains and keep the capital invested. Hence, by opting for this strategy, you can continue to earn interest on your invested capital.