Planning for Retirement? Systematic Withdrawal Plan (SWP) Would Be Your Best Bet
The interest rates of traditional investment avenues such as fixed deposits are on a downward spiral. And that is why, it’s important to look for options that can offer inflation beating returns. This is probably the reason why the popularity of mutual fund’s SWP or Systematic Withdrawal Plan is on the rise.
Systematic Withdrawal Plan: A Brief Introduction
SWP or Systematic Withdrawal Plan is a mutual fund plan in which investors are allowed to withdraw a fixed or variable amount of capital from the fund on a monthly, quarterly, semi-annual or annual basis, as per need. Investors can also customise the cash inflow. It’s up to them whether they want to withdraw only the capital gains or a fixed amount.
Why Should You Invest in A Systematic Withdrawal Plan?
A retired person should never rely on the dividends they receive from funds for regular income to meet their expenses, as there is no guaranty on such dividends. Besides, it’s a mandate of SEBI that dividends will not be paid to investors from the capital of a scheme. It’s from the profits that such dividends can be distributed. That is why financial experts believe that SWP is the best investment option for retired people who want a fixed regular income inflow at regular intervals.
However, there are certain issues linked to the SWP plan. The most important issue is that the SWP strategy might cause the entire capital of an investor to get consumed. If the amount withdrawn outweigh the returns on the investment, then there will be exhaustion of the fund, eventually.
The issue mentioned above is, however, resolvable. But for that, the investors must consult their respective advisors. As a solution, the total corpus should be invested in such a way that the returns earned are higher than the withdrawals made.
The best way to do this is to divide the corpus and then invest it into equity and debt funds in the ratio of 25:75. From this mix, one can earn a return of 8% to 10% over the next five years. And the annual rate of withdrawal suited for this fund would be somewhere around 8%. In certain cases, a higher withdrawal rate may be applied without any detrimental effect.
The only downside to SWP, according to financial experts is of capital erosion, which hampers the growth of capital. But chances of this happening are bleak if the share of the corpus present in equities is not more than 25%.
For any investor, it is important that they choose their investment options carefully. You must also check if you will be levied any tax at the time of withdrawal. Make the withdrawal sensibly so that there is no erosion of capital. Those, who are still not sure whether or not to invest in SWP, should undertake a thorough research on the scheme, and if doubts still persist, approaching a financial advisor seems like the wisest move. In order that capital remains protected and keeps growing, the investor should manage the withdrawals in accordance with the returns of the fund, which is not an extremely difficult job to do.
Mr. Ajay Kumar Jain, M.Sc, Chief Managing Director
Being the Chairman cum Chief Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.