In mutual fund investments, the two most useful options for investors, SIP and SWP, if used wisely, then it could turn out to be a money churner for you.
Almost all of us have heard about the concept of Systematic Investment Plan or SIP. And, how it helps you meet your financial goals with small investments done at a regular interval over a period.
But, in this blog, we will discuss the Systematic Withdrawal Plan or SWP in mutual fund and how it makes a good investment strategy.
What is SWP?
SWP is the opposite of SIP. It allows you to withdraw a fixed sum of money from your mutual fund investments systematically at regular intervals. The intervals could be monthly, quarterly, semi-annually, or yearly.
With every SWP withdrawal, units equivalent to the value of the withdrawals are deducted from your total holdings. The interesting part, the quantum of units deducted varies each month depending on the NAV of the fund. And, the value of your outstanding holding tends to grow, thus giving you higher returns.
How Does SWP Benefit You?
There are numerous benefits of an SWP facility offered by mutual fund houses. Let’s look at each of the benefits.
Helps to withdraw systematically, based on the liquidity requirement
As compared to lump-sum withdrawal, you can fix your withdrawal amount under the SWP facility based on your liquidity requirement. It helps you to avoid the situation of excess liquidity.
Having excess liquidity is bad for your financial wellness as you are money is sitting idle and lowers your returns on investment. Plus, inflation also reduces the value of your money.
Regular Supplement Income
It provides you a fixed periodic income helping to generate a steady income flow and allows planning for your other financial goals. It is best suited for retirees, which allows them to have a fixed income at regular intervals rather than withdrawing the entire investment.
The withdrawals under the SWP facility are not subjected to TDS. And, only capital gains are taxed on the withdrawn amount. But, you can set up your withdrawals in such a manner that you stay within the tax limits and enjoy the total gains.
Rupee Cost Averaging
Under this option, your capital stays invested for a longer duration, which helps in achieving higher yield. It helps to average the NAV of your mutual fund withdrawal over a period rather than encashing your investment at a single rate in lumpsum. It also helps you to avoid the hassle of timing the markets.
How Does SWP Work?
You must have got a fair idea of how SWP in mutual fund works. Now, let’s backtest a popular large-cap equity fund to check the efficiency of SWP.
Suppose, you have an investment worth Rs 1,50,000 in ABSL Frontline Equity Fund -Regular (G) as on date 4th March 2013. Now, you have made an SWP request of Rs 2,000 monthly starting next month, i.e on 10th April 2013 for 7 years.
Using the SWP calculator, the total value of your withdrawal in 87 installments is Rs 1,74,000 and the remaining value of your holdings on 10th June 2020 is Rs 99,987.
Using the SWP route, you have fetched an additional return of 13.99% on your investments during the period. You would have missed the returns, if opted for the lump-sum withdrawal.
As said earlier, if both the options (SIP+SWP) are exercised in a planned way, you can generate a higher rate of return with a very small investment. This is called the magic of compounding.
For senior citizens and individuals, SWP mode is the best for generating stable and higher returns on the investment.