What is Systematic Withdrawal Plan?
Systematic Withdrawal Plan, or SWP, is a method of attaining a monthly income by investing in mutual funds. In an SIP, you invest a fixed sum of money each month so that you can create a large corpus of money in the future.
Now, an SWP is the complete opposite of SIP. Here, you withdraw a fixed amount of money from a large fund on a regular basis. Here, the investment amount and frequency of withdrawal is decided by the investor. For example, the withdrawal can be on a monthly, quarterly or annual basis.
As long as you work, your salary gets deposited into your account regularly. But in case you take a break from work (maternity leave) or if you retire, your income stops. For these situations, financial planning through an SWP is a great way to earn a steady income.
How it works
Imagine you invest Rs 10 lakh in a mutual fund. The fund gives you an annual return of 12%. You decide to withdraw an amount of Rs 10,000 per month through an SWP.
Here, you would specify a certain date for withdrawal. For instance, if you specify the first of every month, you would receive the amount on that date. The best part about SWP is that the invested fund gains steady returns even while you redeem a fixed amount each month.
In this example, after redeeming Rs 10,000 per month for ten years, the capital left in your fund would be around 12.7 lakh. In other words, if the amount you withdraw annually is lesser than the rate of return on your fund, the SWP can go on to perpetuity.
Benefits
- Regular income
SWP is a suitable investment vehicle for retired people who are interested in a steady income. The amount comes directly to your bank account on the specified date. This way, you only withdraw how much you need instead of redeeming your total corpus at once.
- Taxation
SWPs also offer tax benefits to the investor because the money which is withdrawn during the first year of investment does not attract Short Term Capital Gains (STCG) tax. In addition, it is possible to avoid Long Term Capital Gains (LTCG) tax altogether if your long term gains on the amount withdrawn is below the limit of Rs 1 lakh.
- Protection from inflation
A lot of fixed income instruments in the market offer a steady stream of income. However, they offer little or no protection against inflation. As a result, you may not be able to meet your income needs in the future. But through SWP, it is possible to attain inflation-beating returns if you invest in a good mix of debt and equity.
To sum up
A regular income can be extremely important once you retire. And with the cost of commodities and medical expenses rising, it is absolutely necessary to have a steady source of income. That’s why, it is a good idea to invest in mutual funds through an SWP to enjoy a constant stream of income for a long time period.
