SWP, a discerning investment discipline

SWP, a discerning investment discipline

SWP, a discerning investment discipline

When and how to take money out of your portfolio is as important as when and how to invest it.

Most of us know Systematic Investment Plan (SIP), where you place a fixed amount every month in mutual fund in order to generate a corpus over the long-term. But, not many are aware of Systematic Withdrawal Plan (SWP), the reverse of SIP. SWP is for withdrawal what an SIP is for investment. 

SWP lets you set up recurring withdrawals from your mutual fund investment account to generate a fixed amount at a pre-determined time frequency — monthly/quarterly/annually — and help you more efficiently manage your portfolio. You can start a SWP anytime after you invest in a mutual fund.

For instance, you invest Rs 2 lakh under the SWP at the Net Asset Value (NAV) of Rs 20, opting to withdraw Rs 2,000 every month.

Now, you have 10,000 units.  First month, when Rs 2,000 is withdrawn (2,000 ÷ 20 = 100 units), the remaining units available is 9,900 @Rs 20 = Rs 1.98 lakh.  Second month, if the NAV becomes Rs 20.15, units available is 9,800.75 @ 20.15 = Rs 1,97,485.11. Out of Rs 2 lakh, the amount withdrawn is Rs 4,000, and the balance should have been Rs 1,96,000.  However, with a SWP, the balance is Rs 1,97,485.11,  gaining Rs 1,485.11  in two months. 

If the fund value is down, you sell more units and if it is up, you redeem fewer units.  This averages your price, invariably getting a better deal.

 Why SWP?

Investors opt for SWP to meet regular living requirements and tax planning. When Divided Distribution Tax (DDT) in 2013-14 was raised to 25% from 12.5% for all non-equity funds, which included Monthly Income Plans (MIPs), income funds etc., dividend plans became less lucrative due to the high incidence of taxation for tax-payers in all tax brackets. Hence, the growth option is preferred to the dividend option in the realm of mutual fund investment. In lieu of dividend option, investors can now switch to SWP. 

An SWP is considered by those who need another source of income, as it boosts your liquidity. Just like the SIP, the withdrawal plan too helps you ride market cycles. You can exit market investments irrespective of the market conditions.  There is only ‘growth’ option under SWP, as ‘dividend’ option doesn’t go in line with ‘withdrawal’ mode.    

 Look beyond fixed deposits: With bank FD rates on a descent, regular income seekers should look at income funds too. Also interest on FD is taxable, depending on your income slab. Though priority is accorded to FDs and Post Office Monthly Income Scheme, participation in hybrid/balanced funds through SWP offers excellent potential. While no fixed income instrument protects the investor against inflation, the underrated SWP, scores in terms of generating higher returns.

 Tax efficiency: The key advantage is there is no tax on the withdrawals if the holding period is more than one year.  The actual tax liability is much lower compared with bank FDs, and no need to submit Form 15G/H.

 Rupee-cost averaging: With rupee-cost averaging out in a growing market, the longer the SWP, the more you benefit from such approach, also eliminating the need to time the market.

 Investment transparency: The fact-sheet of the fund presents stocks/sector-wise allocation, showing where the corpus is parked.

 Retirement plan: Many people feel for a moment they have earned a splurge when they retire. But if you spend too freely early in retirement, chances are greater that you run out of money.  Planning is vital, especially in today’s context of socio-economic transformation.

Two things should happen to your savings in retirement: (a) Tap them to create an income stream (b) Make them last as long as possible. Both of these can be accomplished with the help of a SWP, until you choose to change/cancel the plan. The lump sum amount by way of PF/gratuity can augment your pension via SWP.

 Longer the stay, more the benefit: SWP from hybrid/balanced funds are rewarding in the long run. As hybrid funds generally invest 65% in equity and the rest in debt-related instruments, downside is limited compared with equity funds. Mapping the opportunities through SWP should be in every investor’s agenda.

(The writer is a former banker)

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