# 5 Smarter ways to use Systematic Withdrawal Plan (SWP) in mutual funds

Smarter ways to use Systematic Withdrawal Plan (SWP) in mutual funds

Systematic Withdrawal Plan is opposite of Systematic Investment Plan (SIP). Systematic Withdrawal Plan(SWP) is where an investor would withdraw a fixed amount in regular intervals like every month or every quarter from their mutual fund investment. While SWP concept is familiar, do you know that there are smarter ways to use the Systematic Investment Plan to get higher returns from your mutual fund investment?

How exactly Systematic Withdrawal Plan works?

Let me explain this with an example.

An investor has 10,000 mutual fund units of a mutual fund scheme, where the mutual fund NAV is Rs 20.00 and the total value of the mutual fund units is Rs 200,000. Now with a systematic withdrawal plan he wants to withdraw Rs 5,000 every month. First month he withdraws Rs 5,000 (Rs 5,000 / Rs 20 NAV = 250 units). The balance units available would be 9,750 units @ 20.00 = Rs 195,000. Second month, assuming that the NAV is Rs 20.15, the amount he withdraws is Rs 5,000 (Rs 5,000 / Rs 20.15 = 248.14 units). The balance units available are 9502.86 @ Rs 20.15 = Rs 191,462. If you observe that out of a total investment of Rs 200,000, the amount withdrawn of Rs 10,000, the balance should have been Rs 190,000. However, with a systematic investment plan the amount of balance is Rs 191,462 thereby gaining of Rs 1,462 in 2 months.  This example is illustrated assuming that the market is rising and hence the NAV has increased. In a growing market, systematic withdrawn plan works well.

What are the Benefits of Systematic Withdrawal Plan (SWP)?

There are various benefits of systematic withdrawal plan:

1)     Rupee-Cost averaging: With rupee cost averaging out in a growing market, the longer the systematic withdrawal plan, the more you benefit from such approach.

2)     Tax advantage: In case you are withdrawing the amounts invested in mutual funds within 1 year, it attracts a short term capital gain. However, with a systematic withdrawal plan, the amount which you are withdrawing would be in smaller amounts and all amounts withdrawn in the first year would be the capital itself. Hence it would not attract tax in case you are withdrawing through SWP.

Why SWP is used in mutual funds?

While regular income comes from Salary, business income, FD interest, pension, etc., Systematic Withdrawal Plan is used to supplement regular income.

5 Smart ways to use Systematic Withdrawal Plan in mutual funds

1) Retirement Plan through SWP

One of the best way to do retirement planning is by SWP through mutual funds. Systematic withdrawal plan is good for investors who look for fixed income over a period of time especially Senior Citizens. Investment in debt funds / hybrid funds / balanced funds can help to gain more and you can withdraw at regular intervals. However, first priority can be given to Bank FD, POMIS etc., which provides fixed income. Part of their investment can be in hybrid funds and SWP through such funds would help them to supplement regular income. Such seniors can look for investing in hybrid funds like HDFC Balanced fund, ICICI Balanced fund, HDFC Prudence fund and debt funds like ICICI Pru long term fund, TATA Dynamic bond fund etc.,

2) Disciplined withdrawal savings through SWP

You would have got Lump sum amount by way of bonus or variable pay or provident fund, through chit fund etc., You want to utilize this amount every month for monthly expenses at home for 6 months to 1 year instead of spending it in one go. In such case best way is to invest in liquid funds or ultra short term debt funds and withdrawing through SWP every month. Liquid funds or ultra short term funds are those where you can liquidate immediately and use your investment.

3) SWP through Monthly Income Plans

Do you know that investment in Monthly Income Plan (MIP) Mutual Funds would provide regular income to you. But if you can invest in growth option of MIP and withdraw fixed income through SWP, you would gain more. The higher the term of investment, the higher returns you would benefit. This is a better option than POMIS or dividend option of MIP Mutual funds. MIP mutual funds provide 8% to 11% annualized returns, hence these are better than POMIS or bank FD’s. Investors can select top MIP Mutual funds like HDFC MF MIP or SBI Magnum MIP etc.,

4) SWP from debt mutual funds

If you are a low risk taker, the best way to invest your lump sum money is investing in long term debt mutual funds. You can do SWP from debt mutual funds and withdraw at regular intervals. While you would get 8% to 10% returns, you would enjoy much higher returns through this approach.

5) SWP through Hybrid funds are more efficient

In a recent analysis from from one of the top financial website, SWP from Hybrid funds are better in 5 to 8 years period than SWP in debt funds or SWP from equity funds. Hybrid funds invest 65% in equity and balance in debt related instruments, hence downside is limited compared to equity funds. Hybrid funds have been performing well and gave 12% to 16% annualized returns in last 8 to 10 years. If you can take some risk, invest in hybrid funds and SWP to withdraw your mutual fund investment at regular intervals.

Conclusion: Longer you stay in mutual funds, you would benefit more. Use SWP only to supplement income and not for regular income. If you want to utilize SWP for short term, invest in liquid and ultra short term debt funds and do SWP. If you want to use SWP for medium to long term, better to invest in hybrid/balanced funds or long term debt funds and do SWP at regular intervals.

Suresh
Smarter ways to use Systematic Withdrawal Plan in mutual funds

• Ravi

Indeed SWP is a smart option to have an augmented income to the existing salary.

This option seems very suited than going in for an additional home

• Ritesh Kumar Agrawal

Dear investors as per todays market condition, if you want that your investment remains safe and u also get an appreciation over it along with regular income, you should follow a simple rule according to which your monthly SWP amount should not be greater than 0.75% of your investment amount. for example if you have Rs.10lks you should invest it an balanced fund and start SWP from preceeding year,(It helps in eradicating Short Term Capital Gain which generally attracts higher Tax) with an amount of Rs 7,500. In this ways U can get return from your investment over life time and after ur Death ur spouce or your next generation can enjoy the same and it will never end. Infact it will keep growing and after every 5-10yrs u can appreciate ur SWP according to the value of your investment.

Example; Rs 10lks invested in an balanced fund on 01.01.2016 (here i m calculating on int. % and not on NAV)

lest assume the funds gives return of 11% so after 1 year the value should be approx 11lk and i start an SWP of 8000 P.M value of my fund after 10 years would be around 14Lks and now u get the power to revice your SWP to Rs. 10,500/- again Ur investment keeps growing and u enjoy the increasing returns lifetime