Systematic Withdrawal Plans: A Smart Strategy for Creating Income from Your Investments
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.
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Systematic Withdrawal Plans
This is where Systematic Withdrawal Plans (SWP) can prove highly useful. This financial tool is 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 an 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, an 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.
To simplify the planning process, investors can make use of a Systematic Withdrawal Plan calculator. This tool helps calculate how many withdrawals you can make based on your total corpus size, planned monthly withdrawal amount, SWP tenure and expected growth rate on your balance corpus. Some tools may also help you identify what the inflation-adjusted size of your corpus if you start your SWPs a few years down the line.
Benefits of SWP
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Regular income stream: The biggest advantage of an SWP is the potential to create a regular income stream. This feature makes it attractive for retirees or individuals seeking supplemental income.
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Flexibility: SWPs offer flexibility in terms of the amount and frequency of withdrawals. They allow investors to choose a withdrawal amount based on their needs. Furthermore, investors can stop, increase, or reduce the withdrawal amounts as per their changing financial situation.
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Cushion against volatility: Since SWP allows for regular withdrawals rather than a lumpsum redemption, it saves the trouble of trying to time the market while redeeming.
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Growth potential: Unlike a lumpsum redemption, a fixed deposit or a public provident fund, a portion of your capital continues to stay invested and get market exposure. This means that your money continues to potentially grow even as you tap into it for funds. This can help sustain withdrawals for a longer period.
Using the Systematic Withdrawal Plan Calculator
An SWP calculator is a crucial tool for planning an SWP. It helps in projecting the amount you can withdraw, how long the investment will last, and the balance that will remain in the fund at the end of a particular period.
To use the SWP calculator effectively, input the following:
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Initial investment amount: The present value of your mutual fund investment.
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Expected rate of return: The average annual return you expect from the mutual fund.
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Withdrawal amount: The amount you want to withdraw at each interval (monthly, quarterly, etc.).
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Withdrawal frequency: How often you want to make the withdrawal (monthly, quarterly, etc.).
The calculator will then show how long your investment will last, or conversely, how much you can withdraw over a given period before the corpus runs out.
SWP vs. SIP
While the Systematic Withdrawal Plan and Systematic Investment Plan (SIP) sound like similar terms, they serve opposite purposes. An SIP is a method of investing where a person invests a fixed sum in a mutual fund at regular intervals (e.g., monthly). This strategy allows for disciplined investing and the potential benefits of rupee cost averaging, where the investor buys more units when prices are low and fewer when prices are high, mitigating the impact of market volatility.
On the other hand, an SWP is a method of withdrawing funds from an existing investment at regular intervals. In essence, an SIP is for building wealth, while an SWP is for gradually redeeming your investments.
In fact, when you’re planning a long-term investment strategy, you can make use of both SIP and SWP. An SIP can help you potentially build wealth over time through regular investments. An SIP calculator can help you plan an investment amount and tenure that can suit your goals. Once you have built an adequate corpus, an SWP can help you use your investments to support you financially.
When to use an SWP
While an SWP is often used post-retirement, it is suitable for anyone looking for a secondary income. For example, a person in their 40s who wants to reduce active work but maintain their current lifestyle might use an SWP. It’s also useful for meeting periodic expenses such as children’s education, home loan EMIs, or any other long-term financial obligations.
A Systematic Withdrawal Plan is a smart and strategic way to create a steady income stream from your investments. It provides flexibility, tax efficiency, and protection against market volatility while ensuring that your money continues to grow. By using tools like the SWP calculator and SIP calculator, investors can plan their finances effectively, ensuring a balance between immediate liquidity needs and long-term growth potential.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
