Can SWP with liquid funds help in creating a regular income stream?

A Systematic Withdrawal Plan (SWP) allows investors to withdraw a fixed amount periodically from their liquid fund investment. SWP in mutual funds offers senior citizens and retirees a means to structure their liquid portfolio to provide a regular inflow of funds. In addition, it enables corporations to deploy a portion of surplus funds every month to meet recurring payables. Therefore, by defining the withdrawal amount and frequency, SWP provides convenience and flexibility.

Read on to learn more about how to use SWP for liquid fund.

• Table of contents

1. How SWP works in liquid fund?
2. Benefits of using liquid funds for SWP
3. Things to remember while setting up SWP
4. How SWPs can be used with liquid funds?
5. How to setup SWP from a liquid fund?
6. Pros and cons of SWP with liquid funds
7. Using SWP helps retired investors meet regular expenses
8. SWP: An all-weather investment strategy

How SWP works in liquid fund?

A Systematic Withdrawal Plan or SWP allows investors to withdraw a fixed amount periodically from their investment in a liquid fund. Investors can choose a monthly, quarterly, half-yearly or yearly withdrawal frequency. The fixed amount is then automatically redeemed from the fund and credited to the investor's bank account on the selected withdrawal date in each period.

SWP in liquid funds can help investors meet regular cash needs in a planned manner without having to manually redeem units from their investment each time. It also allows senior citizens and retirees to structure their liquid fund investments to provide periodic withdrawals as a source of regular income. Corporates can also use SWP to deploy a portion of their surplus liquid funds each month/quarter to meet recurring payables.

Benefits of using liquid funds for SWP

Liquid funds can be a suitable choice for SWPs, especially for investors seeking relatively stable and predictable income with lower risk. Some of the reasons are:

High liquidity: Liquid funds invest in short-term debt instruments (maturing within 91 days), ensuring quick access to funds, which is essential for regular SWP withdrawals.

Low volatility: With minimal price fluctuations, liquid funds offer stability, facilitating consistent SWP payouts and reducing the risk of insufficient funds for withdrawals.

Reduced credit risk: These funds mainly invest in high-quality, short-term debt instruments issued by government entities or highly rated corporations, mitigating default risk.

Regular income stream: SWPs from liquid funds provide a steady income stream, making them suitable for covering regular expenses or supplementing retirement income.

Things to remember while setting up SWP

When setting up an SWP, the investor specifies the desired withdrawal amount, frequency and start date. The fund house will then redeem the necessary number of units from the investor's account on each withdrawal date to pay out the requested amount. The number of units redeemed keeps changing depending on the net asset value of the fund on the date of withdrawal.

This way, SWP provides flexibility and convenience to investors as they get access to a portion of their capital at regular intervals without having to manually sell units each time. However, if the market value of the investment falls below the SWP instalment, the SWP may fail or must be discontinued.

How SWPs can be used with liquid funds?

Liquid funds are ideal for SWPs as they invest in short term debt instruments with high liquidity and limited risk. Some key benefits of using SWP with liquid funds include:

Liquidity:Liquid funds allow easy entry and exit, (subject to exit load) due to investments in cash and cash equivalent instruments. This ensures sufficient funds are available for SWP withdrawals.

Regular income: SWPs help create a predictable monthly/quarterly income stream from one's liquid fund investment corpus.

Limited risk: As liquid funds invest in debt of high-quality companies with maturity of 91 days, the risk is relatively lower than many other debt fund investment.

No reliance on bank deposits: With lower FD rates, SWP from liquid funds offer a potentially reasonable return alternative for regular income needs.

How to setup SWP from a liquid fund?

To setup an SWP from a liquid fund, investors need to fill out an SWP form available on AMC websites or distributor platforms. The form requires details including:

• Folio number from which SWP is to be facilitated.
• Frequency of withdrawal (monthly, quarterly etc.)
• Withdrawal amount.
• Withdrawal date.

On the selected date every month/quarter, the selected amount is redeemed by the fund house and credited to the registered bank account. The minimum withdrawal amount is Rs. 500.

Pros and cons of SWP with liquid funds

Here are some of the advantages of SWP in liquid funds

Low volatility: Liquid funds are relatively stable and their day-to-day value is less impacted by volatility, making it easier to plan a withdrawal strategy.

Stable income stream: Provides potentially predictable income because of the lower volatility

Cons of SWP with liquid funds

Lower returns: Liquid funds offer lower returns than equity-oriented funds or longer duration debt funds. Thuse, the invested corpus may not grow significantly in the long term.

Impact of interest rate changes: Returns can be slightly affected by interest rate changes.

Capital erosion: Excessive withdrawals can erode the initial investment corpus over time owing to the limited growth potential.

Using SWP helps retired investors meet regular expenses

For retired individuals, SWP is a very useful tool to create a regular monthly inflow of funds from existing liquid fund investments. The consistent monthly income can be used towards meeting recurring expenses in a tax efficient manner. It also ensures the remaining portfolio amount continues to be invested and generates potential returns to fulfill long term goals through systematic withdrawals. The relatively low/low-to-moderate risk nature of liquid funds makes SWPs a suitable strategy for retired senior citizens seeking a regular income.

SWP: An all-weather investment strategy

Under volatile market conditions, SWP mutual funds can provide potential stability as the withdrawal is facilitated regardless of market movements on the pre-selected date by redeeming units worth the withdrawal amount. This, however, is subject to the remaining invested amount being over and above the SWP instalment. During market downturns, more units are redeemed and in upturns, fewer units are redeemed for the same withdrawal amount. Over the long term, it averages out the number of units sold for each withdrawal, thus potentially ensuring a regular income without investors having to time the market.

conclusion

Using SWP for systematic withdrawals from liquid fund investments can be an effective way for investors to generate a potentially regular income stream. It helps create a predictable monthly/quarterly stipend from one's portfolio with low risk and high liquidity. Investors can consider the Bajaj Finserv Liquid Fund to generate a regular income stream through SWP and aim to maximise their return potential.

FAQs

How does SWP with liquid funds provide a regular income stream?

SWP with liquid funds provides a regular income stream by redeeming a fixed amount at regular intervals. You build a corpus, set up an SWP, and receive a consistent income.

Is SWP with liquid funds a low-risk investment option?

SWP with liquid funds is considered low-to-moderate risk but not risk-free. Liquid funds offer relative stability and high liquidity. However, risks such as interest rate fluctuations, credit risk, and inflation should be considered. Understanding these risks is crucial before making investment decisions.

What are the benefits of using liquid funds for SWP?

Using liquid funds for SWPs offers benefits such as high liquidity, low volatility, and relative stability of invested capital. These funds can provide stable income streams with lower fluctuations in the fund’s Net Asset Value, resulting in a degree of consistency.

Can SWP with liquid funds be used for long-term income generation?

SWP with liquid funds provides steady income but may not be suitable for investors that seek long-term growth potential or income generation over a very long duration. Liquid funds offer low returns and the growth of the remaining corpus may not beat inflation in the long term, resulting in capital erosion. For long-term income generation, consider equity-oriented or hybrid funds, keeping in mind individual goals and risk tolerance.

How is SWP with liquid funds different from other income-generating investments?

SWP with liquid funds differs from other income-generating investments in the following ways:

Liquidity: Liquid funds provide quick access to cash, often within one business day, unlike instruments like fixed deposits or annuities that lock in capital.

Lower Risk: Liquid funds primarily invest in short-term debt securities, offering relatively stable return potential compared to equity-based investments.

Flexibility: SWPs from liquid funds can be tailored to meet specific withdrawal frequencies, unlike pre-set payouts from fixed deposits or annuities.

Return variability: While relatively stable, liquid fund returns may vary slightly due to market conditions, unlike fixed-rate instruments like FDs.

What factors should I consider before opting for SWP with liquid funds?

Before opting for SWP with liquid funds, consider factors such as your financial goals, risk tolerance, and time horizon. Assess your withdrawal amount and frequency, tax implications, and fund selection. Regularly monitor and adjust the plan to ensure it aligns with your goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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