What is Systematic Withdrawal Plan(SWP)?
Systematic Withdrawal Plan lets you draw a certain sum of money at a consistent interval from your lump sum investments. Systematic Withdrawal Plan (SWP) is a benefit suggested by mutual funds wherein a shareholder can withdraw a pre- approved amount at pre- approved intervals from their funds in certain mutual fund policies. In mutual funds SWP helps in producing a consistent supply of income to pensioners or additional income for those with certain requirements – such as meeting kid’s schooling, consistent cash flows to aged parents etc.
Unlike SIP the SWP works in opposite way to SIP. Therefore, rather than you invest or saving a fixed amount on wealth at fixed (could be monthly or so) gaps, you as a stockholder can take out a fixed amount of amount from your funds on consistent basis. This removal can be a variable or set amount and the removal can be either monthly, quarterly, half yearly, annually, or semi-annually basis. Use SWP calculator to arrange for your post-retirement & other fixed monthly income requirements.
Professionals declare rather than going for dividends, now the SWP route becomes more appropriate for getting fixed sum from equity funds. SWPs assure a fixed income and let stock holders modify the income as per their requirements. Then again, dividends are at the preference of the fund house and may vary with the performance of funds. Starting an SWP following a year from buy of the equity fund allows the investor to receive an assured monthly return.
The Rupee-cost averaging even works in favor of the investors when choosing for SWP like SIP. The investors will end up saving lesser amount of mutual fund units to collect the needed cash flows in a favorable market situation.
In two options SWP is mostly available.
Fixed Withdrawals - In this you indicate a sum you desire to draw from your investments on a Quarterly/Monthly basis.
Appreciation Withdrawals - In this you can withdraw your appreciated sum on a Quarterly/Monthly basis.
To begin a Mutual Fund SWP in Mutual Funds, you require to invest in any of the open-ended Mutual Fund schemes. After investment, you as a stockholder can begin benefiting the SWP facility according to your needs. By availing this mutual fund route for consistent cash flows via SWP, you receive the advantage of Timely Cash Flows together with probable Capital Appreciations on the remaining investments.
The amount drawn from a SWP can be reinvested in some other portfolio or it could be used as a source of fixed income. Shareholders eyeing for income at fixed intervals mostly invest in SWP. Frequently, a SWP is used in funding expenditures during retirement.
How does Systematic Withdrawal Plan work?
Let's know this method with the aid of an example: Suppose in a Mutual Fund scheme you own 10000 units. You give information to the fund house that you need to draw ₹ 10,000 each month via SWP. Now let's suppose that on 1st Dec, the scheme NAV is ₹ 20. MF units’ Equivalent number is = ₹ 10,000 / ₹ 20 = 500. Therefore, 500 units would be saved from your Mutual Fud holdings, and ₹ 10,000 would be provided to you. Your balance units would be 9500 (10,000 - 500= 9500). To find out how much you can draw from your total investments use the SWP calculator above.
Key benefits of SWP
Tax benefit- In case of investment in equity MF for an interval of over a year, the long-term capital return is exempt. Just short-term capital returns are taxable at the rate of 15 percent (if the over-all income does not go beyond Rs 1 Crore) upon withdrawals from equity MF investment in one year. However, in event of debt schemes investments, the capital gain in short term (invested time is below three years) is included to the shareholders’ income & tax according to their tax slabs. In debt schemes long term capital gains are tax @ of 20 percent with indexation. In SWP, the tax is reimbursed simply on the returns made owing to the NAV movement & not on prime part in the withdrawals making the in general tax occurrence lesser. Contrasting to SWP, in traditional investment choices the total gain is taxed as per the tax bracket of investors’ (the maximum at present being 30 percent) considering if the shareholder comes under the highest tax brackets.
Consistent supplemental incomes- The choice of SWP in mutual funds can benefit you by offering a constant income source through your investments. This is particularly helpful for those who require money when their cash flows come to a standstill like retirements, or at the time when additional returns become a requirement owing to the changed incidents in life.
Meeting financial objectives - SWPs may give a regular flow of income when most required if properly planned well in advance. Therefore, they can be combined to long term monetary goals, like offering a fixed income in one’s retiring years or handling your kid’s education expenditures.
But, the use of SWPs might not be limited to pensioners alone. It is even beneficial for middle-aged experts who have the obligation of their family. They may use SWP alternative to get a regular source of finance for their children. They may plan it for their kid’s learning expenditures. They may also plan for a continuous source of income for their parents retired.
One can simply make all the essential calculations prior investing by use of SWP calculators. The SWP calculator aids in deciding the sum to be invested, withdraw amount & the duration. It even helps in knowing SWP meaning in MF in much better way.
A MF SWP is intended bearing in mind the requirements, financial goals & interests of the shareholders. By carefully using tools such as Systematic Withdrawal Plan (SWP) & Systematic Investment Plan (SIP), you might meet your monetary goals without having to experience the trouble of scheduling the markets and taking incorrect financial decisions which will cost you greatly and push you off target.
Investments through MF schemes hold high risk and there is no guarantee or surety that the purpose of the schemes will be accomplished. Thetop calculation/illustration must not be judged as any assurance of incomes to the shareholders / who are deciding for SWP. Considering the individual conditions and risk profile, all investors are informed to refer to their tax/investment advisor(s) prior taking a decision for investing. Returns on the redemption of units of MF are considered as capital returns for income tax reason. MF investments are dependent on market risks, study all scheme linked documents cautiously before investing.