Strategies for setting up a Systematic Withdrawal Plan (SWP) in mutual funds

Many investors who seek a steady flow of income are wary of locking up their wealth in a scheme for a prolonged period. For such investors, the Systematic Withdrawal Plan (SWP) can be a good option. SWP is a method to realise potential returns on investments and offers an avenue for regular cash inflow. For mutual fund investors, understanding the intricacies of SWP can yield significant benefits.

In this article, we will delve into the nuances of SWP in mutual funds and offers strategies on how to use SWP wisely.

• Table of contents

1. What is SWP in mutual funds?
2. How to set up a systematic withdrawal plan?
3. Who benefits from SWP?
4. How to use SWP smartly and wisely?
5. Bajaj Finserv AMC
6. FAQ

What is SWP in mutual funds?

A Systematic Withdrawal Plan (SWP) allows investors to withdraw a specific amount of money from their mutual fund portfolio at predetermined intervals – monthly, quarterly, or annually. Instead of redeeming the entire investment at once, SWP offers a structured withdrawal method. This not only provides a regular income flow but also takes advantage of the power of compounding on the remaining investment depending on market movement.

How to set up a systematic withdrawal plan?

Select a suitable fund

Performance: Ensure that the mutual fund scheme in which you plan to set up an SWP has a consistent track record. Look at the past 3-5 years’ performance, although keep in mind that past performance is not an indicator of future returns.

Risk profile: Align the mutual fund with your risk tolerance. If you are risk-averse, consider debt funds. Conversely, if you can handle market volatility, pure equity funds might be more appropriate.

Exit load: Some mutual funds charge an exit load if units are redeemed before a specific period. It is crucial to understand this aspect, as frequent withdrawals can lead to higher charges. Or you can choose a fund that permits certain portion of investments to be redeemed without exit load.

Choose the withdrawal amount

Fixed sum: This is a specific sum that you decide at the outset. It remains consistent throughout unless you make changes.

Percentage-based: Here, you choose to withdraw a percentage of your total investment or the current value. This method can be more dynamic but requires closer monitoring.

Determine the frequency:

Monthly: Suitable for those who need a regular monthly income, such as retirees or individuals supplementing their regular income.

Quarterly: A good choice for investors who don't need monthly withdrawals and can wait for a quarterly pay-out.

Annually: Suitable for those with a long-term horizon and no immediate income needs. Annual withdrawals can be a strategic choice for tax planning purposes.

Initiate the SWP

This can be done either online or offline through the chosen AMC, or through a financial advisor.

Review terms and conditions

Before finalising the SWP, revisit the fund's terms and understand any charges associated with premature withdrawals. Some funds may also have restrictions on the minimum amount you can withdraw through SWP. You can also decide if you want an indefinite SWP (until you stop it or the investment depletes) or a fixed duration SWP.

Who benefits from SWP?

The beauty of the systematic withdrawal plan lies in its versatility. Various investors can reap its advantages:

Retirees: Those looking for a consistent income stream post-retirement find SWPs especially useful. It helps in maintaining a desired lifestyle without eroding the principal too quickly.

Salaried individuals: For those who earn regular salaries, SWP can act as an additional income source or as a fund for occasional expenses.

Freelancers and self-employed professionals: Individuals with irregular income patterns can use SWP to ensure a consistent cash flow during lean periods.

How to use SWP smartly and wisely?

Monitor and adjust: Always monitor your investments and the performance of your mutual funds. If you see consistent underperformance, consider stopping the SWP and switching to another fund.

Understand tax implications: The withdrawals made are subject to capital gains tax. Depending on the holding period and type of fund (equity or debt), the tax treatment can differ. It is crucial to understand these nuances to ensure that the SWP remains tax-efficient.

Reinvestment strategy: If you don’t need the withdrawn amount immediately, consider reinvesting it in another asset class or financial instrument. This way, you can potentially enhance your returns further.

Flexibility: While you might have set an SWP, always be ready to modify it based on changing financial needs. This flexibility ensures that you neither withdraw too much nor too little.

Conclusion

Understanding how to use SWP in mutual funds can offer a blend of constant income and potential capital appreciation. By integrating the strategies mentioned above, investors can harness the full potential of a systematic withdrawal plan. As with any financial instrument, staying informed, consulting a financial advisor, regularly reviewing performance, and being adaptive to changing financial environments can make the journey of using an SWP in mutual funds both rewarding and financially enriching.

Bajaj Finserv AMC

Bajaj Finserv AMC has launched five schemes including a flexi cap fund, liquid fund, overnight fund, money market fund and arbitrage fund. Each of these investment options provides professional management and potential for return. 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 is the primary purpose of a Systematic Withdrawal Plan (SWP)?
SWP allows investors to withdraw a predetermined amount from their mutual fund investments at regular intervals, helping them manage income needs.

What are the different SWP strategies?
Common strategies include fixed amount SWP, capital appreciation SWP, and periodic rebalancing SWP, tailored to an investor's specific financial goals.

Can investors customize the withdrawal frequency and amount in SWP?
Yes, investors have the flexibility to choose the frequency (monthly, quarterly, etc.) and amount they want to withdraw through SWP.

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.