ystematic Withdrawal Plan
Now, that we knew what is an SIP, we will try to know about SWP. Needless to say, SWP is personal favorite to many of us. Systematic Withdrawal Plan or SWP is a mutual fund investment plan through which investors can withdraw fixed amounts at regular intervals, from the investments one has already made.
HOW DOES SWP WORK?
Consider one chooses to withdraw fixed amount at defined regular intervals from the corpus they already have in the mutual fund scheme. Then, SWP generates the cash flow by redeeming units from the scheme. The number of units redeemed, depends on amount one specified to withdraw and NAV of the fund on that day.
HOW CAN SWP HELP AND WHY SHOULD ONE MAKE USE OF SWP?
Flexibility: SWP allows the investor to choose the amount, frequency and date of withdrawals.
Creates a regular source of Income: With SWP, one can create a regular source of income at pre-determined intervals
Capital Protection: While we redeem units at every interval, remaining corpus still remains invested.
Capital Appreciation: If the rate of SWP is more than returns generated, then one can witness capital appreciation too in long term.
DIVIDEND OPTION:
Dividend Option also offers regular income. Dividends are distributed by the mutual fund depending on distributable surplus that the scheme has able to generate.
SWP OVER DIVIDEND OPTION:
- Dividends depends on the fund. The investor has no say in this case unlike SWP.
- Dividends offered may not be regular.
- Amount offered and as dividends, their frequencies are not predictable.
- SWP option is tax efficient over dividend option.
An illustration is given to explain the working of SWP :
*Assumptions taken:
- The client needs Rs. 6 Lakhs in retirement
- The growth rate of the fund is 8%
- The inflation rate is 4%, thus the client would withdraw 4% excess amount every year
Conclusion :
In this way, the corpus lasts for 25 years and helps to provide regular cash flow. This is especially useful in case of retirement where there is need for money at regular intervals.
“HAVE AN EXIT PLAN EVEN BEFORE YOU ENTER.” Having a flexible exit plan is as important as entry one. Choose wisely, use efficiently.