Most of us either know about the Systematic Investment Plan (SIP) or heard about it. But we rarely hear about similar strategies like Systematic Transfer Plan (STP) and Systematic Withdrawal Plan (SWP).
Our previous posts explored strategies like Systematic Investment Plan (SIP) and Systematic Transfer Plans (STP) which can help you invest, manage risk and build wealth.
In this post, we’ll delve into an investment tool – Systematic Withdrawal Plan (SWP), which can help you receive a regular income from your wealth.
Estimated read time: 3 minutes and 25 seconds
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Buckle up. Here we go!
What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) is an investment strategy that allows you to withdraw a fixed amount of money systematically from your mutual fund investment. It acts as a regular income stream, helping you meet your financial needs without depleting your entire corpus in one go.
Such a system is particularly suited to retirees, who are typically looking for a fixed flow of income.
How does SWP work?
Let’s break down the workings of an SWP in simple terms.
Suppose you have accumulated a significant corpus in a mutual fund. And you require a steady stream of income. Instead of withdrawing a lump sum, which may deplete your investment quickly, you can opt for an SWP.
With SWP, you will receive a fixed amount every month from your investments.
Also, this can be applicable if you inherited a lump sum amount and want to use it as a regular income.
How to set up SWP:
1. Determine the withdrawal amount and frequency
Decide the amount you want to withdraw and the frequency at which you want to receive the withdrawals (monthly, quarterly, etc.).
2. Initiate the SWP
Fill in the necessary forms and instructions with your mutual fund provider or investment platform to set up the SWP. They will automatically execute the withdrawals as per your specified frequency and amount.
Benefits of a Systematic Withdrawal Plan (SWP)
1. Regular income stream
SWPs provide a consistent income stream, allowing you to meet your regular expenses or financial goals. It can be beneficial during retirement or when you need to supplement your primary income.
2. Flexibility and control
SWPs offer flexibility in terms of withdrawal amounts and frequencies. You can choose the amount that suits your needs and adjust it as per changing circumstances. Moreover, you have control over the timing and frequency of the withdrawals.
3. Tax efficiency
Depending on the type of mutual fund and the holding period, SWP withdrawals may attract different tax implications. In certain cases, long-term capital gains tax benefits may apply, making SWPs tax-efficient compared to other forms of income.
Limitations of a Systematic Withdrawal Plan (SWP)
1. Market risk
SWPs are exposed to market risks, especially when investments are in equity. Fluctuations in the market value of the investment can impact the withdrawal amounts and the sustainability of the SWP over the long term. A downturn in the market may deplete the investment faster than anticipated.
2. Income sufficiency
Depending solely on SWP for regular income may pose a challenge if the investment corpus is not sufficient or if the withdrawal amounts are not appropriately set. Inadequate corpus or excessively high withdrawal rates may deplete the investment sooner than expected, compromising future income needs.
3. Taxation considerations
SWPs may have tax implications depending on the type of mutual fund and the holding period. Short-term capital gains tax and tax on dividends may apply in some instances, affecting the net returns from the SWP. It’s important to consider the tax implications and consult with tax professionals to optimize tax efficiency.
Ways to Combine SIP, STP, and SWP Strategies
Now that we have explored SIPs, STPs, and SWPs individually, let’s understand how these strategies can work together to enhance your investment experience.
1. Pre-retirement strategy
As retirement approaches, you can employ a combination of SIPs, STPs, and SWPs. Use SIPs to accumulate a retirement corpus by investing in equity funds. As retirement nears, initiate an STP to gradually transfer funds from equity to debt funds. This approach helps mitigate market volatility and preserve capital. Finally, once retired, you can set up an SWP to receive a regular income stream from your investments.
2. Capital preservation and regular income
If you have a lump sum amount that you want to preserve while generating a regular income, you can use a combination of STPs and SWPs. Initiate an STP to transfer the lump sum into a debt or liquid fund, thereby preserving capital. Then, set up an SWP to receive systematic withdrawals from the debt fund, ensuring a steady income stream to meet your financial needs.
Remember, the suitability of these strategies depends on your specific financial goals, risk tolerance, and investment horizon. It is necessary to regularly review and fit your investment approach to changing market conditions and consult with financial advisors or professionals to ensure you make informed decisions.
By combining SIPs, STPs, and SWPs, you can create a holistic investment plan that manages wealth accumulation, risk management, and regular income needs throughout different stages of your financial journey.
Remember to share these insights with your buddies. Until next time!
Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Cleartax – Systematic Withdrawal Plans – How SWP Works? Taxation
ET Money – All You Need to Know About Systematic Withdrawal Plan
Warikoo – Systematic Withdrawal Plan EXPLAINED!
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.