SWP: Withdrawal income alongside Investment

Got a lump sum and want to invest it but also want a regular income? 

Well a systematic Withdrawal Plan or SWP is the option for you. Under SWP, if you invest a lump sum in a mutual fund, you can set an amount you’ll withdraw regularly and the frequency at which you’ll withdraw.

We all have been bombarded with  “SIP Kalre” and pave your way to financial planning and achieve financial freedom. SIP certainly stands out to be the most effective and popular investment option for a periodic investment devoting a percent of your earning to investment aligning with the guidelines of rules of investing, but investing a lump sum via SIP is both a hectic and inefficient way to invest. SWP bridges that gap and provides the best way to invest your lump sum capital.

In this blog, we would discuss the whats and hows of SWP, buckle up and earn a regular income alongside creating a retirement fund!

What is SWP?

SWP stands for Systematic Withdrawal Plan. It is an investment facility offered by mutual funds or investment schemes that allow investors to withdraw a fixed amount at regular intervals from their investment holdings. The primary objective of SWP is to provide investors with a steady income stream while keeping their invested capital intact.

With SWP, investors have the flexibility to choose the frequency and amount of their withdrawals based on their financial needs. The withdrawals can be scheduled monthly, quarterly, semi-annually, or annually, depending on the investor’s preference. The amount withdrawn can be a fixed sum or a percentage of the investment value.

SWP is particularly beneficial for individuals who are looking to generate regular income from their investments, such as during retirement or when they need to supplement their existing income. It offers a disciplined approach to managing withdrawals and can help meet financial obligations or fund specific goals over an extended period.

Why SWP

• Regular Income Stream: SWP allows investors to receive a consistent income stream from their investments, providing financial stability and meeting regular cash flow needs.
• Capital Preservation: With SWP, investors can withdraw a portion of their investment returns while keeping the principal amount intact. This allows for potential capital appreciation and continued growth of the remaining investment.
• Flexibility: Investors have the flexibility to choose the withdrawal frequency and amount based on their financial requirements. They can customize the SWP to align with their income needs and make adjustments as necessary.
• Convenience and Automation: SWP automates the withdrawal process, ensuring that investors receive their desired amount at regular intervals without having to manually monitor and execute each withdrawal.
• Diversification: SWP allows investors to diversify their income sources by selecting different mutual funds or investment schemes for withdrawal, spreading the risk across multiple investments.
• Tax Efficiency: Depending on the investment instrument and holding period, SWP can offer potential tax benefits. Investors may benefit from lower tax slabs, indexation benefits, or favorable capital gains taxation, reducing their overall tax liability.

Points of consideration before SWP

Before initiating a Systematic Withdrawal Plan (SWP), there are several points that investors should consider to ensure it aligns with their financial goals and circumstances. Here are some key points of consideration:

• Financial Goals: Evaluate your financial objectives and determine if SWP aligns with those goals. Assess whether you require a regular income stream, need to meet specific expenses, or aim to preserve capital while generating income.
• Income Needs: Calculate your income requirements accurately. Consider your monthly expenses, emergency fund needs, and any anticipated future expenses. This will help determine the appropriate withdrawal amount and frequency for your SWP.
• Investment Horizon: Assess your investment time horizon. SWP may be more suitable for individuals with a longer investment horizon as it allows for potential capital appreciation and growth over time.
• Risk Tolerance: Understand your risk tolerance level. SWP involves the potential risk of market volatility, and the value of your remaining investment may fluctuate. Determine if you are comfortable with the potential fluctuations in the investment value.
• Portfolio Diversification: Review your overall investment portfolio. Ensure that your investments are well-diversified across different asset classes, sectors, or geographic regions. SWP should be considered as part of an overall diversified investment strategy.
• Investment Performance: Evaluate the historical performance of the investment scheme or mutual fund from which you plan to initiate SWP. Assess its track record, consistency, and risk-adjusted returns.
• Tax Implications: Understand the tax implications associated with SWP. Depending on the investment instrument and holding period, tax liabilities may vary. Consult with a tax advisor to determine the potential tax impact on your SWP withdrawals.
• Fund Expenses: Consider the expenses associated with the mutual fund or investment scheme offering SWP. These expenses can affect the overall returns generated through SWP. Compare the expense ratios of different funds and select the one with competitive fees.

SWP Calculation

The SWP Calculator shows you the regular cash flows through the systematic withdrawal plan. You must use the mathematical formula:

 A = PMT ((1+r/n)^nt – 1) / (r/n)) 

where,

A = Future Value of the Investment 

PMT = Payment amount for each period 

n = number of compounds in a period 

t = the number of periods the money is invested.

For example, you have an initial investment of Rs 1,20,000 in a mutual fund scheme. You redeem an SWP amount of Rs 10,000 per month. You have a withdrawal tenure of 12 months. The expected annual return is 7%. 

 You have a future value of Rs 4,026 as shown in the table. You can calculate your own, SWP Plan here.

Conclusion

SWP bridges the gap between SIP and a savings account, providing portfolio diversification, tax benefits, income needs along capital prevention.

In conclusion, SWP provides flexibility between a regular income ad investment option from the same lump sum corpus.