MUTUAL FUNDSSYSTEMETIC INESTMENT PLAN (SIP)

Systematic Withdrawal Plans

How to generate regular income from SWP

Systematic Withdrawal Plans, also known as SWP are considered to a scheme which permits the investor to make withdrawals from his mutual fund scheme every month on a date that has already been set by him. This withdrawal could be a fixed or a variable amount and it could be done either monthly, quarterly, semi-annually or even annually.

With the idea of systematic withdrawal plan, an investor can customize the flow of cash as per his very own requirement. Being an investor, you can select to either withdraw the capital gains on your investment or any fixed amount. This way, you wouldnโ€™t be having your money still invested in a particular scheme, but you will also be able to have an easy access to the regular income and various other returns planned by you. The money that you withdraw could be taken into use to reinvest in various other funds and the same could also be retained by you in the form of cash.

The need of Systematic Withdrawal Planning:

With the idea and concept of Systematic Withdrawal Plan, you can create a good flow of income from your investment which would be regular in nature. Thus, if you are seeking to have a flow of periodic incomes for your needs like travel, vacation or any other, you can set this provision to fulfill the same. Systematic Withdrawal Planning should be created in such a way that whenever you need the most amount of cash, it would be readily made available for you.

Systematic Withdrawal Planning: A good investment option:

Systematic Withdrawal Planning is considered to be a wise investment strategy in the present time. This is because on the first place the withdrawal so made (also known as redemptions) are not subject to any kind of tax deductions at source. The capital gains are taxed on the amount so withdrawn. At the same time, you always remain at the option of setting up your withdrawal in such a way that you are only able to withdraw the appreciated which has been made up on the amount so invested. This process and flow of money keeps your capital invested in the same place whilst you can enjoy all the profits and gains on regular time period.ย 

Options of Withdrawals:

The idea of systematic withdrawal planning gives you a fixed withdrawal option. Thus, with this particular option, you can have an access to a particular amount from your investment on either a monthly basis or a quarterly basis. Alongside, with the option of appreciation withdrawal, you are always at the opportunity to withdraw only the appreciated amount on a monthly or a quarterly duration.

Working of Systematic Duration Plan:

The idea of Systematic Duration Plan affects your mutual funds account too. Thus, it is very important to take a note that Systematic Working Plan is not same as opening a fixed deposit account into a bank where you tend to receive interests at a monthly basis. In case of a fixed deposit, the corpus value do not get impacted upon the withdrawal of the interest, however this is not the case with the idea of systematic withdrawal plan. In the latter case in mutual fund schemes, the value of your fund is always reduced by the number of units that you are supposed to withdraw.

Example:

Suppose you have 10,000 units into your mutual fund scheme and you are planning to withdraw Rs.5, 000 every month by the way of systematic withdrawal plan. Letโ€™s assume that the Net Asset Value of this particular scheme is Rs.10. Thus, this withdrawal of Rs.5, 000 from this scheme would mean that 500 units are being sold in total which is 5000/10. The amount which is remaining in your mutual fund post this process of withdrawal shall be 10000-500 = 9500 units.

During the very beginning of the next month, the Net Asset Value of your scheme increases to Rs.20, then this particular withdrawal of Rs.5, 000 would mean selling of 250 units that is 5000/20. The mutual fund would be then left with 9500-250 = 9250 units post the process of withdrawal.

This is how along with each withdrawal that you make, the mutual fund encounters a decline in all its units. As the net asset value increases, the redemption of the units gets lesser in terms of its count and as soon as it falls, it experiences an opposite effect and hence requires the redemption of more units.

A very important part of benefitting from this particular plan and making the most of it is by planning the systematic withdrawal plans keeping in mind all your needs as well as your end goal. You should not opt for any kind of unrealistic withdrawal amounts for it could have a detrimental effect on to your fund.

Tax Implications of Systematic Withdrawal Plans:

The redemption of the systematic withdrawal plan is always subject to taxation. If your holding period is less than 36 months, then the amount which you are going to withdraw will add to the part of your income and the same would be taxed as per and in accordance with the slab of your income. On the other hand, if the holding period exceeds 36 months, then the amount that you are going to withdraw shall be subjected to long-term capital gains tax that is 10 percent sans indexation as well as 20 percent with indexation. Thus, being an open-ended fund, it fetches you with the opportunity and the option of redeeming the investment or changing it at the very same time.

Regularity in terms of Systematic Withdrawal Plans:

With a systematic withdrawal plan, you will always be assured of getting a fixed amount at your frequency that has been pre-planned or pre-determined by you. The nuances with all other options such as monthly income plans paying dividends are that the amount as well as frequency of the payouts is never fixed. If there is no appreciated to be distributed, you might not have any dividend to be paid. Thus, every month you will be having different amounts coming in and some month there would absolutely be no amount received.

Protection from inflation:

Most of the financial instruments do not offer any kind of inflation beating returns. Though the principal amount may be secure, the income might always fall short of the needs in the future. Thus, the idea of systematic withdrawal plans falls short in the coming needs. SWP scores in regard of generating returns so as to keep up with the process of inflation, particularly if you opt for an equity fund.

Drawback:

The only drawback in terms of the idea of systematic withdrawal planning is that it will be going to eat your capital at some point of time.

However, this judicious mix of investment instruments would always make sure that your major goal of income generation shall be met without getting you running out of money whenever in need. Thus, on the whole Systematic Withdrawal Planning is one wise and noteworthy strategy to use for the generation of regular income in a number of scenarios.

 

 

 

 

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Chalo Niveshak

We are financial Advisor based at Ahmedabad. having a vaste experience of more than 10 years in financial sector. More than 500 families are happily enjoying services provided by us in their financial planning journey. We are also associated with more than 10000 financial advisors accross India and discussing about various needs and problems of investors. so we know how to deal with various objectives of various goals of our investors better than others.

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