Imagine a scenario: Mr. Abhijeet is a regular investor in mutual funds, building up his savings for a secure future. However, as he approaches the end of his investment term, he realises he doesn’t want to withdraw his entire savings in lump sum. Rather, he wants to withdraw his money at regular intervals to get a steady income flow while leaving the rest of his capital to continue working for him. This is where a systematic withdrawal plan (SWP) helps.
SWP offers a disciplined approach to withdraw money from your mutual fund investments. With SWP, a specified amount is redeemed from your investment at regular intervals. Its frequency can be monthly, quarterly, half-yearly, or annually, and the same amount gets credited directly to your bank account. The remaining holdings’ value continues to fluctuate with the market, offering the possibility of capital appreciation.
SWP is the opposite of a Systematic Investment Plan (SIP), where a fixed amount is invested regularly in mutual funds. In SWP, the flow of transactions reverses. Apart from providing regular income, SWP also helps manage cash flows and prevent the depletion of savings in an emergency.
How does SWP work?
When an investor enrols in an SWP, a certain number of units of the mutual fund scheme are sold to the extent of the pay out amount, and the money is transferred to the investor’s bank account.
Suppose you have invested Rs. 1,40,000 in a mutual fund and set up an SWP for Rs. 10,000 monthly pay outs for 14 months. In this case, you will receive 14 pay outs (10,000 every month). Note that the remaining units will still be subject to market fluctuations. Thus, the overall value of your investments can also appreciate or depreciate.
Moreover, you can customise the plan according to your requirements and objectives. You have the flexibility to pause or modify the SWP amount if your income level changes. Just make sure to submit the request at least 10 days (or as specified in your plan) before the next SWP instalment date.
What benefits do investors get with SWP
- Regular income
SWP in mutual funds provides a steady stream of income for investors. Unlike other investment options where investors receive income only at maturity, with SWP, investors can start receiving regular income from the beginning. This regular income can be used to meet everyday expenses or supplement other income sources. The fixed nature of the income can also help investors plan their expenses more efficiently.
- Disciplined investing
An SWP ensures automatic redemptions of mutual fund units, regardless of market conditions. This disciplined approach protects investors from making hasty, fear-driven withdrawals during market corrections. It also prevents impulsive investments during market highs, as SWP continues to withdraw funds, keeping your investment strategy steady and aligned with your financial goals.
This disciplined investing approach promotes a balanced and rational investment behaviour, leading to better long-term outcomes.
- Power of compounding
When you opt for SWP, a portion of your investment is redeemed regularly, but the remaining amount stays invested in the mutual fund scheme. Thus, your remaining holdings continue to earn returns over time, not just on your initial investment but also on the gains it generates. This compounding effect can significantly boost the growth of your investment over the long term while maintaining liquidity through regular withdrawals.
- Diversification benefits
Many investors use SWP to rebalance their portfolios. By withdrawing from mutual funds and reallocating the proceeds into other assets like stocks, bonds, or real estate, investors implement a well-diversified and balanced investment approach. This approach helps mitigate risk by dividing investments across various asset classes, reducing vulnerability to fluctuations in any single market.
Let your money work for you through the power of an SWP
From providing regular income during retirement to managing daily expenses, SWP offers specific advantages that can benefit investors. Through its disciplined approach, SWP allows investors to enjoy a steady cash flow, all while earning returns from their existing investments. Moreover, its adaptability means that you can always customise the method based on your specific needs and get the much-needed flexibility to achieve your goals.