3rd Oct 2024 Pune, Maharashtra, India The objective of investing money is to potentially create financial freedom. This could involve long-term wealth creation. It could also involve facilitating a secondary income stream to sustain your post-retirement lifestyle, supplement your income or support you financially during a career break.
This is where Systematic Withdrawal Plans (SWP) can prove highly useful. This financial tool helps individuals potentially generate steady income from their investments. A fixed amount is paid out to you at regular intervals – monthly, quarterly, half-yearly, etc. – from a mutual fund scheme. These payments can continue at a predictable schedule as long as there are sufficient funds.
What is a Systematic Withdrawal Plan (SWP)?
SWP is a provision that allows an investor to withdraw a fixed amount of money at regular intervals from their investment in a mutual fund. Instead of selling off the entire investment in one go, an SWP enables you to plan consistent withdrawals that can act as a supplementary income stream. This strategy is often employed post-retirement. It can also be used by someone who wishes to create a regular passive income.
The primary mechanism of a SWP is simple: you invest in a mutual fund scheme, either at one go or over time, and then withdraw a predetermined amount at your chosen frequency. Different asset management companies may have different SWP provisions. Some may require you to withdraw a fixed amount each time, some may require you to redeem a specific number of units, some may offer multiple options.
One of the key advantages of SWP is that while the withdrawals are happening, the remaining portion of your investment continues to potentially earn returns, making it a more strategic option than withdrawing a lumpsum. This means that even as you tap into a portion of your investment, the balance continues to get market exposure and access growth potential.
How does SWP work?
Let’s understand SWP with the help of an example. Suppose you invest Rs. 10,00,000 in an equity mutual fund that yields an average annual return of 13%. If you set up an SWP to withdraw Rs. 20,000 per month, the mutual fund will liquidate the required units (based on the prevailing Net Asset Value or NAV) each month to generate that amount. Meanwhile, the remaining balance continues to grow if the fund earns returns.
In essence, a SWP provides a balance between earning potential and liquidity. It helps investors tap into their funds without losing out on long-term capital appreciation potential.
Using a Systematic Withdrawal Plan calculator
Deciding a suitable SWP strategy can be challenging because investors need to identify a withdrawal amount that suits their needs but does not deplete their corpus too quickly. Then, they need to factor in the potential growth on the part of their corpus that stays invested. The balance amount, too, will change with each withdrawal.