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 ₹ 20.00 and the total value of the mutual fund units is ₹ 200,000. Now with a systematic withdrawal plan he wants to withdraw ₹ 5,000 every month. First month he withdraws ₹ 5,000 (₹ 5,000 / ₹ 20 NAV = 250 units). The balance units available would be 9,750 units @ 20.00 = ₹ 195,000. Second month, assuming that the NAV is ₹ 20.15, the amount he withdraws is ₹ 5,000 (₹ 5,000 / ₹ 20.15 = 248.14 units). The balance units available are 9502.86 @ ₹ 20.15 = ₹ 191,462. If you observe that out of a total investment of ₹ 200,000, the amount withdrawn of ₹ 10,000, the balance should have been ₹ 190,000. However, with a systematic investment plan the amount of balance is ₹ 191,462 thereby gaining of ₹ 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 In a growing market, systematic withdrawn plan works well.
Also Read: Which are the top and best mutual funds to invest now?
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with a systematic withdrawal plan, the amount which you are withdrawing would be in smaller amounts and all amounts withdrawn in the first year would be the capital itself.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.,
Also Read: Best Balanced / Hybrid Mutual funds to invest in 2015
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.,
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.
Also Read: Which are the best Debt Mutual Funds to invest?
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.
If you like this article, please share this on your Facebook or Twitter. This would be a special gift which you would be giving to our blog.
Suresh
Smarter ways to use Systematic Withdrawal Plan in mutual funds
Discover more from Myinvestmentideas.com
Subscribe to get the latest posts sent to your email.
Dear Sir
I am Retired and age 55 and my wife is house wife and my only daughter is doing her final year UG , with this background i want to know the following
1) which are the BEST TOP ONE / TWO SWP DIRECT MF which can give me monthly 36 k yet the investment will grow , and i will not touch that money for the next 15 years or so , HOW MUCH I NEED TO INVEST so that i can invest two in my name and two in my wife name FOR TAX PURPOSES
2) Which are the TOP 4 DIRECT BALANCE MF LOW RISK HIGH RETURN as iam retired for a long term investment for the next 6 years for my daughter MARRIAGE
please do revert back thanks :ramanc5@yahoo.com
3) Is Aditya Birla Sun Life “95 Fund is a coorect option for SWP , is investing into one Direct SWP MF is the correct option or investing into two is the correct option if so which are they
4) is SBI MF Bandhan SWP is the best option
Raman
Dear Suresh sir, Which are the best SWP based on last 15 yrs of good returns can you please list out ..I am regular investor of ULIPS ICICI PRULIFE Opertunity fund..6 policies will get matured on 2025.
Maxlife by 2027 all together near about 1 crore ..presently I am a NRI..
2025 I am plan to retire from my middle East job..please propose SWP which can give me RS 50,000 for 45lakhs SWP amount.
Hi
I would like to invest 7 lakhs in a liquid mutual fund with a SWP of Rs 45000 per month for one year .Could you suggest the fund name and the appromixate annualised return bearin in mind the SWP
Hi, If we invest 10 lakh in balanced fund, remain invested but start SWP of INR 10000/PM. What will be the corpus after 10 years.
Kannan
Sir, I want to invest one lakh rupee in SWP and need 800 per month please suggest which one mutual fund is best for me, i dont know anout share market etc.
Hello Suresh,
I used to invest in FD, but now first time i have invested 1 lakh in Axis bank fixed month income mutual fund. i don't know anything about mutual fund, i asked them to credit invest monthly to my account and so they are credited 1000 to my account monthly. is this interest i am getting from my mutual fund investment as SWP. so at the end do i get my whole 1 lakh amount, like FD. please suggest as i don't know about it much.
thank you.
Suresh Sir,
Very good article.
I am retiring this month.My retirement fund will be Rs 85 Lacs.I have no pension.
I have investments in
Birla Medium term plan:Rs 10L,Holding for last 3 Yrs
Birla MIP Wealth 25 plan:Rs 10L,Holding for last 4 Yrs
HDFC MIP-LTP :Rs 6.40 Lacs,Holding for last 3Yrs
ICICI Pru Bal Adv fund:Rs10.40L,Holding for last 3Yrs
Reliance Regular Savings-Debt Plan:Rs14.50L,Holding for last 4Yrs
Birla Sl FL Eq fund:Rs6L
ICICI Pru Val Discovery fund:Rs6L
Sundaram Select Mid Cap:Rs5L(Holding for last 2.5Yrs
Religare Invesco Banking Fund:Rs7.50L,Holding for last 3Yrs
BSL Bal 95 Fund:Rs10L,ICICI Pru Balanced Fund:Rs 6L,HDFC Prudence Fund:Rs5L
Total invetment is Rs98L as on 15/12/16.
I want to have a Monthly regular income of Rs 50,000 from accruals only. Capital remain as it is.
My two sons are studying in Senoir & Junior intermediate in a residential college in Vijayawada.Their Fee per year is Rs2L each.
I have ULIPs which generate a maturity amount of Rs25L in 2021.
I have Mediclaim for Rs4L & Max Bupa Health Insurance for Family at Rs4L.
I have to pay a Premium of Rs1.5L for next two years for ULIPS.
I Have Residential plots amounting to Rs 35L in Rajahmundry.
I have a 1150 Sqft Flat in Madhurawada,Visakhapatnam.I settle in Visakhapatnam.
I get an amount of Rs30L from inheritance. my Father is a pension holder, aged 89.
Please advise me how to lead a comfortable life for the next 20 Yrs.
I will be grateful and waiting for your advise.
My E-mail ID:kramarao1956@rediffmail.com/mr.monikonda@rediffmail.com
Good information for those who need regular income from their investments. I would invest a part of my investment in Dynamic bond fund, a part in Balanced equity fund and some in Ultra short term fund, all offering SWP. I will, as far as possible limit monthly withdrawal to 0.75% on my investment amount from that scheme. Is it a good plan without losing my capital for years to come ( long or very long period of years) I have no other income. Your reply will be appreciated.
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
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
i want to know the best SWP hybrid funds please tell me thanks
which are the SWP hybrid /BF/LTDF funds you suggest for a investment of 24 lakhs for a period of 10 years and i would like to have 50000 per month as SWP and would like to double the money in 10 years please suggest and i am sure there is no tax implication in SWP if i withdraw after one year
Hello Mr Suresh,
I also like to hear the reply for the question posted my Mr Raman above
which are the SWP hbrid/BFL/LTDF funds you suggest for an investment of 20 lakhs for a period of 10 years and I would like to have 40000 per month as SWP.
Will my investment amount will be back after 10 years completion or this monthly amount I get on SWP is my part money from this 20 lakhs and I don’t get any amount after my 10 years completed…Not clear on this can you answer is briefly
Very interesting. Showing the other side of SIP which no one else promotes.
Ghana Syam
This is very informative and valuable.
Could you please tell me about tax implication on Quarterly/Monthly pay out on MIP scheme….
Regards
Tamizh
Hi Tamizh, If you are opting our quarterly pay-out from MIP scheme by way of dividends, these are tax free. However MF houses would pay necessary taxes from their end. Hence it is tax free in your hands.
for the systematic withdrawal what should be the ideal withdrawal amount for a period of six years. is there any calculation?
I am 32 and investing 2000 per month in the below mentioned funds i.e. 12000 monthly through SIP:
UTI-MID CAP FUND – GROWTH
Birla Sun Life Frontline Equity Fund -Growth-Regular Plan
HDFC Top 200 Fund – Growth
HDFC Prudence Fund – Growth
SBI Blue Chip Fund – Regular Plan
ICICI Prudential Focused Bluechip Equity Fund – Regular Plan – Growth
I wish to invest 6000 more to make my monthly investment of 20000 via SIP. Can you recommend me only 3 good funds which will balance my portfolio please at the earliest.
Regards,
Pranay
Excellent Write up Suresh , Exactly what I was looking for. Thank You
Thanks a lot Sirji
is it wise toinvest in liquid funds and withdraw systematically before three years considering the tax implications
Liquid funds, you should invest only for very short term of 3 to 6 months
Thanks a lot providing wodeweful article. Learnt a lot how to make benefit by using SWP.