Why is SWP a Smart Option for Regular Income?

It is quite true that every individual has a unique goal for investing in a financial scheme. Some may have long term goals like retirement planning or buying a weekend home while others may have short or medium term goals like building a corpus for their child’s wedding or making the down payment of their new car. Setting realistic goals may prove to be the key factor behind effective financial planning.

Once you know your goals, investors need to decide which investment schemes to invest in depending on their risk appetite. Knowing one's risk appetite is equally important because that way you might get a clear idea about how much of your monthly income you can allot. It is always good to diversify your portfolio with financial schemes that suit your risk appetite. If you are someone who seeks long term capital gains and also doesn’t mind giving your investments a slightly aggressive approach, you may consider investing in mutual funds.

What are mutual funds?

Mutual fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy in stocks and other debt and money market instruments like bonds, government securities, certificates of deposits (CoDs), Treasury bill, etc. depending on the scheme’s risk profile and investment objective. This pool of capital raised through investors is referred to as a mutual fund. Mutual fund investors are allotted mutual fund units in proportion to the money invested and depending on the fund’s existing net asset value (NAV). It is believed that the mutual fund’s performance might depend on the performance of its underlying assets and the sectors or industries in which they invest.

Just like there are two options for investing in mutual funds i.e. via lumpsum investment or via SIP (Systematic Investment Plan), mutual fund houses also offer the option of SWP (Systematic Withdrawal Plan) for those seeking regular income through their mutual fund investments. If you wish to find out about Systematic Withdrawal Plan, continue reading.

What is Systematic Withdrawal Plan ( SWP)?

Are you wondering how you will take care of your expenses post your retirement and looking to supplement your income. If you wish, you may plan your investments with a Systematic Withdrawal Plan (SWP). A Systematic Withdrawal Plan allows you to withdraw a predetermined amount every month at fixed intervals. A Systematic Investment Plan is kind of opposite to a Systematic Investment Plan (SIP). In SIP, the investor decides the amount and date on which the money is debited from his or her savings account and transferred to the mutual fund. In SWP, a predetermined amount is debited from the unitholder’s mutual fund and electronically transferred to his or her bank savings account. SWP may be considered by anyone who seeks regular income. It could be a retired individual or someone who is planning to start their own business or simply anyone who seeks regular income through their mutual fund investments.

Why to opt for SWP for regular income?

Unlike IDCW payouts which aren’t guaranteed and only happen if the scheme manages to make capital gains, an SWP doesn’t have any such restrictions on their withdrawal policies. Irrespective of a mutual fund scheme’s market performance, an investor is entitled to his or her fixed monthly withdrawal amount. This may be a better option over IDCW where the fund manager decides when to roll out IDCW to the investors. Also, those who opt for an SWP may benefit from rupee cost averaging. With an SWP, you can withdraw a certain predetermined amount at your predetermined intervals. All one has to do is fill to automate withdrawals for the time period specified according to his or her financial needs.

As an investor if you are assured of receiving a fixed amount, it is beneficial for the investor because they need not worry about the scheme’s market performance. For someone who seeks financial independence, a Systematic Withdrawal Plan may prove to be a sensible choice.

Now that you are aware of how an SWP works, have you decided to opt for one? If you want you may even start an SWP for one of your family members so that they become financially independent.

But investing in mutual funds has its own risks and if you are someone who is completely new to the world of investing or doesn’t understand financial planning, we recommend you seek the help of a financial advisor or a mutual fund expert. Invest smartly and do not invest beyond your risk appetite because mutual funds invest in equity and capital gains from equity investments are never guaranteed.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.