Systematic Withdrawal Plan (SWP): A Steady Income Stream Post Retirement

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Introduction

Systematic Withdrawal Plan (SWP) is a unique feature offered by mutual funds that allows investors to withdraw a fixed sum of money at regular intervals from their investment. SWP provides a systematic approach to generating a steady income stream while maintaining a presence in the mutual fund. One can consider it just like a pension amount that an individual receives on a monthly basis post-retirement.

SWP in mutual funds
 
 

How Does SWP Work?

When you opt for SWP, you specify the withdrawal amount and frequency, such as monthly, quarterly, or annually. The mutual fund then sells a predetermined number of units to generate the required amount. This way, you receive a regular payment while keeping a portion of your investment in the mutual fund.
 

Benefits of SWP

  • Regular Income Stream: SWP allows investors to receive a consistent income stream, which can be particularly beneficial for retirees or individuals seeking supplemental income.
  • Capital Appreciation: SWP provides the advantage of potential capital appreciation, as the remaining investment in the mutual fund continues to participate in market growth. This can help preserve the value of the asset over the long term. 
  • Convenience and Flexibility: SWP offers the comfort of automation, where the predetermined amount is automatically withdrawn from the mutual fund. Additionally, you have the flexibility to adjust the withdrawal amount or frequency based on your changing needs. 
  • Tax Efficiency: SWP allows investors to benefit from tax-efficient withdrawals. Depending on the type of mutual fund and the duration of investment, you may be eligible for capital gains tax benefits, especially in debt-oriented funds.

Considerations for SWP

  • Investment Objective: Determine if your investment objective aligns with the need for regular income. SWP is generally suitable for investors who prioritize income generation while maintaining exposure to the mutual fund.
  • Risk Appetite: Evaluate your risk tolerance and select a mutual fund that aligns with your risk profile. For conservative investors, debt-oriented funds may be more appropriate, while those seeking potential growth can consider equity-oriented funds.
  • Market Conditions: Keep an eye on market conditions and the performance of the mutual fund. Periods of market volatility may impact the overall value of your investment.
Lets take example for easy understanding:
 
We have considered 3 hybrid funds – Canara Robeco Equity Hybrid Fund, ICICI Prudential Equity & Debt Fund and HDFC Balanced Advantage Fund.
 
The initial investment amount considered is Rs. 25 Lacs. Monthly withdrawal is taken at Rs. 15,000/-. Investment is assumed to be made on May 1, 2013. The below returns are as on May 31, 2023.
 
 
SWP in mutual funds
 
As can be seen from the above table, Rs. 18 Lacs were withdrawn during the tenure of 10 yrs i.e. 120 months. But still, there is substantial appreciation of the investment amount almost double the investment amount despite the market volatility and other major events that occurred including the COVID-19 pandemic.
 

Conclusion

SWP in mutual funds offers investors a convenient and reliable method to generate a steady income stream while keeping their investments active. By choosing an appropriate withdrawal amount, frequency, and mutual fund category, investors can achieve their financial goals, whether supplementing retirement income or meeting regular expenses.
 
However, it’s crucial to carefully assess individual investment objectives and risk tolerance, and most importantly take the help of a financial advisor to make informed decisions regarding SWP in mutual funds.

 

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