Dynamic SWP strategies for changing income

The rampant rise of the “gig economy” post the pandemic has made it clear that not everyone nowadays has a steady, predictable income to rely on. In fact, currently, many retirees, self-employed individuals, and freelancers often face the challenge of irregular or changing income patterns. To meet their monthly expenses and maintain their desired lifestyle, the usual financial planning methods may not be suitable, and a more dynamic financial approach is needed

This is where the Systematic Withdrawal Plan (SWP) in mutual funds, an adaptable financial tool becomes relevant and indispensable.

• Table of contents

1. What is SWP in mutual funds?
2. Key features of SWP in mutual funds
3. How does SWP in mutual funds work?
4. Benefits of SWP in mutual funds for regular inflow of funds
5. Dynamic SWP strategies for changing income
6. Bajaj Finserv AMC

What is SWP in mutual funds?

SWP in mutual funds refers to the Systematic Withdrawal Plan, a facility provided by mutual funds that allows investors to withdraw a predetermined amount at regular intervals. Instead of getting a lumpsum amount at once, an SWP enables you to draw smaller amounts at scheduled times – like a “reverse SIP” (Systematic Investment Plan).

Key features of SWP in mutual funds

Flexibility: You can choose the withdrawal amount and the frequency of withdrawal.

Capital appreciation: The remaining amount in the mutual fund continues to stay invested and earn potential returns based on market movement.

How does SWP in mutual funds work?

When you opt for an SWP, you instruct the mutual fund house to redeem a certain number of units or a specific amount at predefined intervals. The fund house then credits the proceeds from SWP to your bank account. If you chose to receive a regular amount, the number of units redeemed varies based on the Net Asset Value (NAV) on the redemption date. If the NAV is high, fewer units will be redeemed, and if it is low, more units will be redeemed.

Benefits of SWP in mutual funds for regular inflow of funds

Predictable cash flow: Even if you have an unpredictable income, an SWP ensures that you receive a fixed amount at regular intervals.

Maintained lifestyle: The periodic inflow can help retirees and freelancers maintain their standard of living.

Money continues to grow: Even as you withdraw, the balance amount remains invested and continues to earn returns based on market movement.

Dynamic SWP strategies for changing income

The variable nature of freelancers' and retirees' incomes necessitates the implementation of dynamic SWP strategies. Here are a few strategies tailored to these needs:

Variable SWP: Unlike the traditional SWP (where you withdraw a fixed sum regularly), a Variable SWP strategy allows you to adjust the withdrawal amount according to your monthly expenses and earnings.

Let's assume that during some months you get more freelancing projects and therefore more income. In such a scenario, you can choose to decrease your SWP amount for that month. Conversely, in months where assignments are scarce, you might need higher SWP withdrawals to meet your lifestyle needs. This flexible strategy provides real-time adaptability, ensuring that your mutual fund corpus isn't depleted too rapidly during high earning months, while you have enough money during the lean months.

Ladder strategy: Think of this strategy as diversifying your investments across different asset classes. The idea is to break your mutual fund investments into multiple parts based on your risk appetite and financial goals. Your immediate financial needs can be taken care of by debt fund investments, which tend to be relatively stable.

Longer-term needs, on the other hand, can be taken care of by equity funds. Depending on your current financial situation, you can adjust the SWP from each of these separate pools. This tactic ensures that you have liquidity when needed, without compromising on long-term growth.

Buffer strategy:This strategy involves creating an emergency fund, and is highly useful during extreme fluctuations in income. In months where your earnings surpass expectations, you can reduce your SWP amount and direct the extra income to this emergency fund.

Additionally, during months where earnings are below average, you can draw from the emergency buffer instead of increasing the SWP. This method ensures that the core mutual fund investment remains largely untouched during financial downturns, allowing it to grow and compound.

Review and reset: Given the fluctuating nature of incomes these days, it becomes essential to frequently assess the SWP strategy. At least once a year, review your withdrawals, your mutual fund's performance, and your earnings. If you're withdrawing too much, it might deplete your funds sooner than anticipated. If you're withdrawing too little, you might not be meeting your expenses comfortably or you might be missing out on potentially better investment opportunities.

Regular reviews ensure that you stay on top of your financial goals and adapt to any significant changes in your earning patterns or market conditions.

Conclusion

In an era where incomes are becoming increasingly variable, strategies that offer flexibility and predictability, like SWP in mutual funds, become essential. With its inherent advantages of regular withdrawals, and potential capital appreciation, a mutual fund SWP can be the cornerstone of financial planning for those with irregular income patterns. By employing dynamic SWP strategies and consulting with a financial advisor, professionals can ensure financial stability and meet their financial goals despite the unpredictability of their earnings. However, it is necessary to note that SWP starts with having a lumpsum amount that is invested which allows you to draw money from it periodically as SWP to meet your cash flow requirements.

Bajaj Finserv AMC

Bajaj Finserv AMC has launched schemes including a flexi cap fund, liquid fund, overnight fund, arbitrage fund, and money market fund. Each of these investment options provides professional management, potential for returns on the invested amount. However, it is important for investors to assess their investment objectives, risk tolerance, and consult a financial advisor before making any mutual fund investments.

FAQs:

What are dynamic SWP strategies?

Dynamic Systematic Withdrawal Plans (SWPs) are investment techniques that adjust withdrawal amounts based on market conditions. They help retirees maintain periodic income stability in fluctuating markets.

How do I choose a suitable Dynamic SWP strategy?

Assess your risk tolerance and financial goals to select a strategy that aligns with your needs. Consult a financial advisor for personalized guidance.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.