Systematic Withdrawal Plan or SWP is a process of redeeming money from Mutual Funds. SWP is the opposite of SIP. In SIP, individuals invest their money earned through regular Income in Mutual Fund schemes. This investment is done in small amounts at regular intervals. On the contrary, in SWP individuals redeem their Mutual Fund holdings and get back the money credited to their Bank account. Individuals can exercise the option of Systematic Withdrawal Plan to augment their income. This scheme is more suitable for retired people. So, let us understand the concept of the Systematic Withdrawal Plan, how individuals can do Retirement planning through Systematic Withdrawal Plan, benefits of SWP, and other related parameters.
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Systematic Withdrawal Plan is a systematic and strategic technique of redeeming the Mutual Fund units. SWP can also be considered as an automated redemption process in Mutual Funds. The frequency of redemption from the Mutual Fund schemes can be customized by investors as per their requirements which can be weekly, monthly, or quarterly Basis. While opting for Systematic Withdrawal Plan, individuals first deposit a considerable amount in a Mutual Fund scheme. This scheme can either be a liquid fund, ultra short-term fund, or any other Mutual Fund scheme. After depositing the money, individuals withdraw their investments at regular intervals as per their requirements.
The concept of SWP can be helped with an example. Assume, Mr. Sharma has taken a sabbatical leave of one year to pursue his hobby. He has demarcated INR 5,00,000 to meet his expenses for the entire year. However, Mr. Sharma is worried that he might end up spending the money soon and he would be left with no money. In order to overcome this issue, Mr. Sharma decides to invest the money in Liquid Funds as it carries the lowest level of risk and opts for SWP option for INR 40,000. Through this, Mr. Sharma can be rest assured that he will receive monthly income and earn more on his investments.
Systematic Withdrawal Plan has its own benefits. Some of the major ones are as follows.
SWP can be used for creating a regular source of income flow for individuals, especially for retirees. Moreover, individuals also earn returns on their Mutual Fund investment depending on its performance and the type of scheme in which the investment is done.
Through SWP, individuals can only redeem the required money and can keep the excess amount invested. Thereby, it creates a disciplined withdrawal habit among individuals. This will help individuals retain their investments as required thereby preventing Capital erosion.
Individuals can discontinue the SWP process whenever required and redeem the entire money in case of urgency. However, if the money is invested in case of fixed deposits or other investment avenues that have a lock-in period, it is difficult to redeem money in such cases.
SWP acts as a substitute for pension for individuals wherein; they can use it as a pension amount once they stop working. As a consequence, pensioners can get a sigh of relief as their investment generates returns and also they are able to earn a regular source of income.
The working methodology of Systematic Withdrawal Plan is explained with an illustration. Assume Rakesh has recently retired and has received INR 40 Lakhs in the form of retirement benefits. He has invested INR 30 Lakhs in a property and the remaining INR 10 Lakhs in a liquid Mutual Fund scheme having with monthly SWP option.
As on the date of investment, the NAV of the scheme was INR 10. Therefore, the number of units he held was 1,00,000 units (10,00,000 Units/ INR 10). His monthly requirement is INR 10,000 that needs to be credited on the 5th of every month into his bank account.
Therefore, at the end of the first month assuming the NAV is again INR 10, the number of units redeemed will be 1,000 (1,00,000 units/ INR 10 NAV). Therefore, the balance units held post redemption are 99,000 (1,00,000-1,000).
In the second month assume the NAV rose to INR 20. In this case, the number of Units withdrawn will be 500 only and not 1,000. As a consequence, the number of units held will be 98,500 (99,000-500).
Further, in the third month, due to certain economic fluctuations, the NAV fell to INR 8. In this situation, the number of units redeemed would be 1,250 (INR 10,000 / NAV INR 8). Therefore, in this situation, the balance units will be 97,250 (98,500 – 1,250).
As a result, it can be concluded that if there is an increase in the NAV then, the SWP will continue for a longer tenure, and in case of a decline in the NAV, the SWP will erode at a faster pace.
The Systematic Withdrawal Plan is subject to tax as per the redemption rules depending on the Mutual Fund category. For instance, in case of Debt fund, if the withdrawal tenure is less than 36 months, then Short Term Capital Gains (STCG) is applicable. If the investment is held for a tenure of more than 36 months, then Long Term Capital Gains is applicable. STCG in case of debt funds is added to the individual’s income and taxed as per the slab rates while LTCG is taxed at 20% with indexation benefits.
However, in case of Equity Funds, the taxation rules were different. Till F.Y. 2017-18, no LTCG applicable on equity funds but since, F.Y. 2018-19, it is applicable. In equity funds, LTCG up to INR 1 Lakh is exempt and above INR 1 Lakh is charged to tax at 10% (plus cess) without indexation benefits. STCG is case of equity funds is charged at 15%.
Individuals can plan for their retirement through Systematic Withdrawal Plan. Here, individuals can deposit their retirement benefits (such as gratuity or provident fund) in a Mutual Fund that carries low-risk such as Money market funds. Post Investing, they need to opt for SWP option through which individuals can start getting monthly income.
One of the advantages of SWP is the money does not get blocked as compared to other avenues such as Senior Citizen Savings Scheme (SCSS) or Post Office Monthly Income Scheme (POIMS). Individuals can stop the SWP option whenever they want and can redeem the entire funds back to their bank account. In addition, their investment also earns returns that can be used by the individuals. However, one of the disadvantages of SWP is it leads to capital erosion as the withdrawal is done from the exisiting money which is not the case in SCSS or POIMS.
In case of SWP, individuals can opt for money market funds which have the lowest level of risk, therefore, some of the top funds under money market category are listed below as follows.
Fund NAV Net Assets (Cr) 1 MO (%) 3 MO (%) 6 MO (%) 1 YR (%) 2020 (%) Debt Yield (YTM) Mod. Duration Eff. Maturity Aditya Birla Sun Life Money Manager Fund Growth ₹286.292
₹11,383 0.3 1.1 1.9 5.2 6.6 4.01% 5M 23D 5M 26D ICICI Prudential Money Market Fund Growth ₹294.347
₹9,655 0.3 1 1.8 5 6.2 3.88% 5M 16D 5M 8D UTI Money Market Fund Growth ₹2,384.89
₹6,800 0.3 1 1.8 4.9 6 3.71% 5M 19D 5M 25D Kotak Money Market Scheme Growth ₹3,481.27
₹9,431 0.3 1 1.8 4.5 5.7 3.73% 4M 24D 4M 28D L&T Money Market Fund Growth ₹20.8357
₹1,066 0.2 0.7 1.3 3.7 5.4 3.43% 2M 16D 2M 16D Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 12 May 21
Thus, from the above parameters, it can be said that Systematic Withdrawal Plan has its own benefits. However, investors should have a complete understanding of the scheme in which they are planning to start an SWP. They should check whether such option is required or not. This will help them to achieve their objectives on time.
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