• 26th May 2024

Who should consider starting a SWP?


Just like investors need to take a call while investing in mutual funds and decide whether they want to go with the regular plan or direct plan, they need to also make a decision on how they would prefer withdrawing their investment amount. For your information, a direct mutual fund plan can be directly brought from the fund house. It is because of this that the expense ratio of a direct mutual fund plan is low. On the other hand, a regular plan can be brought from a broker, an aggregator or any third party dealing with mutual funds. But since a third party is involved in the selling of a regular plan, the expense ratio of this fund is always high as compared to regular plans.

Now if you did not know the difference between these plans, you may have realized why it is necessary to do some basic research before investing in mutual funds. Now mutual funds do help in long term wealth creation but there are recurring expenses which investors need to take care as well.

A Systematic Withdrawal Plan not only helps an individual withdraw money at regular intervals, but the amount that is left after the withdrawals is invested back in the scheme for potential income generation

Systematic Withdrawal Plan (SWP), tool that works just like a Systematic Investment Plan (SIP). However, the only difference between an SWP and SIP is that with SWP you are withdrawing a fixed amount at regular intervals from your mutual fund portfolio. Where else in SIP, you invest a fixed amount at regular intervals in your mutual fund. The withdrawal amount can be customized depending on the investor’s financial needs. While the SWP is activated for regular withdrawals, an investor continues to invest in that mutual fund scheme through SIP or lumpsum investment.

Who should opt for a Systematic Withdrawal Plan?

Before deciding who should or should start a SWP, let us first understand why we need to consider stating an SWP. Mutual funds are constantly exposed to the market’s volatile nature. The performance of a mutual fund is directly proportional to the performance of its underlying assets and how they tackle market volatility. If the underlying assets perform terribly, there is a good chance that the net asset value of the fund you invested in will deplete. This means that if you do not redeem your mutual fund units when the NAV is high, your investment will lose its value and you may not be able to achieve your financial goal.

In come Systematic Withdrawal Plan, a tool that allows investors to redeem the fund units at regular intervals so that they can tend to their financial needs. If you do not need a large surplus to fulfil your financial goal and a systematic withdrawal can go the job for you, then a SWP may work in your favour.  The function of an SWP is to offer investors funds so that they do not have to compromise on their standard of living. Generally, a Systematic Withdrawal Plan is opted by those who are nearing retirement or have retired. SWP assures them a fixed amount which is debited from their mutual fund and credited to their registered savings account.

However, it does not imply that only those who are retired or nearing retirement should opt for an SWP. An SWP can act as a second income of salaried investors as well. If you have quit your job and started a new business, an SWP can help you take care of your day to day bills, like grocery utility bills, travel expenses, etc.

If you want to have enough corpus in your mutual fund to start an SWP, you should invest in mutual funds systematically through SIP. In case you do not know how much money you need to invest in order to achieve a decent corpus, you can take the help of an online SIP calculator.

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