What is a systematic withdrawal plan?
An SWP mutual fund is a facility that allows withdrawal on a regular basis from existing mutual funds. Therefore, instead of redeeming the entire amount at once, you can plan to withdraw a fixed income regularly from your mutual funds. Besides deciding on the amount, you want to receive as regular income you can also choose the frequency of withdrawal which can be monthly, half yearly, quarterly or annually. An SWP calculator can be used to plan your systematic withdrawal plan. The scheme you choose for your SWP can be equity mutual funds, or debt funds based on your risk appetite. However, it is pertinent to mention here that since equity funds have given higher returns historically, you may choose these funds for your SWP to get the maximum benefits.
Care must be taken to choose the amount of regular withdrawal such that the principal amount in the existing mutual fund is sufficient to provide it over the SWP tenure. This is a delicate balance between the amount of withdrawal in view of the rate of returns expected to be earned by the remaining amount in. This amount can be quite easily calculated with a free systematic withdrawal plan calculator readily available online.
There are two types of systematic withdrawal plans:
- Fixed Withdrawal: In this type of withdrawal, you can choose the amount you want to receive as regular income at each interval. As mentioned earlier, the amount should be such that you can hope to withdraw funds till the time you need. For this you need to calculate the returns of the funds in relation to the withdrawal amount. Using an SWP calculatorwill make this calculation easy.
- Appreciation Withdrawal: In this type of withdrawal, you may choose to withdraw only the appreciated amount, or the profits on your investment at every interval. In this context, it is advisable to note that choosing this option will help protect your principal amount invested in equity mutual fundsSWP, against market volatility. Hence, if there is no profit in that time period, there will not be any automatic withdrawal. Here also a systematic withdrawal plan calculator can help you determine what might be your income in each period, by assuming an expected rate of returns.
Benefits of Systematic Withdrawal Plan
SWP offers many benefits over lump sum redemption to the investors.
- Rupee cost averaging: Since the NAV of a mutual fund is calculated daily, you can benefit from rupee cost averaging. This means that at higher NAV, you redeem a lesser number of units to provide for your withdrawal amount. At the same time, the higher mutual fundNAVmakes the value of your investment larger.
- Discipline in investment: Your investment plan requires a disciplined approach so that the corpus you create can provide for your financial goals. This means that not only investing, but the plan should also factor in the withdrawals at the times you need your funds. By planning ahead, you can make your withdrawal plans as robust as the investment plan. The help you get from a systematic withdrawal plan calculatorto determine the amount you can withdraw also goes a long way to plan your finances.
- Discipline in withdrawal: If you have invested in the systematic withdrawal plan in an equity fund, you would see that in bull runs, the fund value may suddenly appreciate. This may make you want to withdraw a larger amount than required. SWP plan lends discipline to your withdrawals as well by strictly regulating your withdrawal amount to what you need.
Talk to your mutual fund distributor or financial advisor to start investing in an SWP.
