Mutual funds have become popular investment solutions for people these days. In fact, the interest of individuals in mutual fund investment has drastically increased in the last few years. This smart investment tool has come up with many investor-friendly options to meet the short as well as the long-term financial goal of the investors. One of such facilities offered to the investors is the Systematic Withdrawal Plan or SWP under which the investors invest a lump sum amount in mutual fund schemes in order get a specific return at a predefined time interval such as yearly, monthly, quarterly, and half quarterly.
SWP shouldn’t be mistaken with a bank fixed deposit where you get a fixed amount of money every month without affecting the principal amount. In SWP every time you withdraw an amount from your mutual fund it will impact your principal amount. For example, you have invested a principal amount of Rs.50,000 in a mutual fund scheme and wish to withdraw Rs.10,000 every month. Every time you make a withdrawal the principal amount will get reduced. In order to compensate for this reduction from your principal amount, the scheme must generate a return from the remaining amount by next month.
Another form of withdrawal is capital appreciation. In this case, you withdraw only the return gained from your investment without disturbing the principal amount. So, in case your investment doesn’t generate any gain in a particular month then you will not get any amount that month. In both the cases, you must have a clear understanding of your requirement and should withdraw accordingly. Sudden withdrawals without any clear understanding may have a negative impact on your investment.
Key features of SWP
- Taxes with indexation benefit: An SWP is considered as a long-term investment plan and this is why if the investors go for withdrawal after one year of investment they needn’t pay any tax.
- Regular return and high gain: In case of fixed deposits, you invest a fixed amount for a specific period with a fixed return amount. However, in SWP you can expect a much higher return with every passing month. If the mutual fund scheme where you have invested in gives out better returns then there are chances that you a better return than fixed deposits.
- Investment in SIP: In case you receive a regular income, you can reinvest the returns that your mutual fund units yield under the SWP investment. Every month or every quarter, whatever money you get from SWP can be reinvested in another SIP. That means your lump sum investment for an SWP scheme will help you to start an investment in another scheme without having to invest any additional amount from your income.
- Inflation benefits: Your fixed deposit in the bank will give you a fixed amount without considering the inflation rate. However, an SWP will generate returns in accordance with inflation to balance it out. Especially, if you choose to invest in a fund which invests in equity and its related securities there are higher chances of receiving inflation benefits. Low risk: SWPs enable you to withdraw a specific amount of money every month from your account and thus it helps in averaging any volatile turn of the market. Since you can take out amount at regular intervals the risk of losing your entire investment is less in SWPs.
- Minimum balance: To start an SWP account you must have a minimum balance of Rs.25,000 in your mutual fund. Though this is a lump sum amount that you have to pay before starting the plan, this money will not be locked-in and you can keep withdrawing it in parts over a period of time at regular intervals.
Who should invest in an SWP?
Every individual who wants to get a sustainable amount of money at regular intervals should consider investing in an SWP. It is ideal for people who are approaching retirement. After retirement, not only will they get a sizeable amount but will also get a fixed amount to meet their financial needs every month. Even business professionals or self-employed individuals can invest in an SWP to enjoy a good payout at regular intervals. If you are planning to go for a long vacation and need a regular income then also an SWP will assure you a regular flow of income every month.