SWP Success: Vital considerations before opting for a mutual fund SWP

While making an investment in mutual funds can help build a strong investment portfolio, it does not automatically lead to an income stream that can help fund their post-retirement lifestyle. Enter mutual fund SWPs, short for Systematic Withdrawal Plans, which can help investors experience a high quality of life even after they stop earning.

What is a systematic withdrawal plan (SWP)?

SWP in mutual funds is an investment tool that allows you to invest in mutual fund and withdraw a pre-determined amount on a regular basis, thereby generating a regular inflow of funds. You can choose the withdrawal amount, frequency, and duration of your mutual fund SWP at the time of setting it up and change it later based on changing needs.

Once you set up your SWP, the withdrawal amount will be automatically transferred to your account by the Asset Management Company (AMC) on the chosen withdrawal date. Contrary to popular belief, investors are allowed to add further investment into their SWP or withdraw more than the fixed amount from their SWP.

You can invest in a Systematic Withdrawal Plan (SWP) if:

• You are close to retirement and want to set up a regular inflow of funds from your investment.
• You want to divert money into a different investment instrument in the future.

How does a systematic withdrawal plan work?

When you invest in a Systematic Withdrawal Plan (SWP) in mutual funds, you must choose the withdrawal amount, frequency, and duration. The withdrawals continue based on these parameters until the end of the SWP period or the balance is nil in your mutual fund account.

Let’s understand it with an example.

If you invest Rs. 1 lakh in a mutual fund SWP at a NAV of Rs. 20 and set up a monthly withdrawal frequency of Rs. 5,000 after 12 months of investment. Initially, 5,000 units (Rs. 1 lakh / 20) are allotted to your account.

If the new NAV is Rs. 22 after 12 months, then 227.272 units (Rs. 5,000 / 22) need to be redeemed for the first withdrawal. The balance units in your account will be 4772.728.

In the next month, if the NAV is Rs. 23 then 217.391 units (Rs. 5,000 / 23) need to be redeemed leaving 4,555.337 units (4772.728 minus 217.391) in your account. This will continue until the end of the SWP period or until all units have been redeemed. (For illustration purpose only)

4 things to consider before setting your SWP in mutual funds

Here are the four things you must keep in mind when setting up your mutual fund SWP:

Your needs: The foremost thing you need to keep in mind when setting up your Systematic Withdrawal Plan (SWP) in mutual funds is to identify your needs. Are you setting up the SWP to meet your monthly expenses? Are you trying to generate a second source of income? Are you solely investing in SWP for portfolio diversification? This will help you decide the withdrawal amount, duration, and frequency of your SWP.

Growth rate: If you want to be smart about your investment, then you will have to use one of the mutual fund SWP tips: “Keep your withdrawal rate lower than the fund’s growth rate.” This will help preserve your capital for a long time provided the markets do not correct. You can add more units to your account by making fresh investments. You just need to review your SWP regularly to get the most optimised returns.

Withdrawal rate: You can choose one of three withdrawal frequencies available in SWPs: monthly, quarterly, and yearly. If you are a retiree who wants to generate monthly inflow of funds, then a monthly frequency would be the obvious choice. It all depends on your needs and your investment strategy. The good part is that you can tweak the withdrawal rate, amount, and frequency at any time. You can even pause the withdrawals whenever you want.

Inflation: Whether it is SWP in mutual funds or any other type of investment, inflation affects the purchasing power of your money. What you can buy for Rs. 1 lakh today may cost Rs. 1.15 lakh in 3 years, depending on inflation. In the same way, the value of your investment will also change over time. Therefore, you must review your investment strategy and modify your SWP, whenever required.

In conclusion, a mutual fund SWP is ideal for investors who want to generate a regular stream of income from their investment. While retirees and people close to retirement may find SWPs ideal for them, the flexibility associated with SWPs – like changing the withdrawal amount, frequency, and duration – make them favourable for most investors.

FAQs:

What are the critical factors to consider before starting an SWP from a mutual fund?

Key considerations include your financial goals, income needs, risk tolerance, the choice of the mutual fund scheme, the withdrawal frequency, and tax planning. These factors ensure the success of your SWP strategy.

How can I determine the withdrawal amount for my SWP?

The withdrawal amount should align with your financial goals and be sustainable over the long term. You can use online calculators or consult a financial advisor to determine an appropriate withdrawal amount.

What steps should I take if my SWP isn't meeting my income needs?

If your SWP isn't providing sufficient inflow of funds, you can consider adjusting the withdrawal amount, switching to a different fund, or exploring additional income sources like part-time work or other investments.

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.