Systematic Withdrawal Plan: How and When it works for you
Investors can use mutual funds for a complete financial planning. There are various options available which help you achieve your financial goals. One such option is Systematic Withdrawal Plan (SWP), which offers you an option to withdraw a specific amount of pay-out at a pre-determined time interval, like monthly, quarterly, half-yearly or annually from your invested corpus. This works similar to a Systematic Investment Plan (SIP), however, instead of investing in funds you withdraw from your corpus. At a pre-determined period, units from your funds are sold and money is credited to your bank account.
When Can You Use SWP
SWP is one of the most unused investment strategies in the mutual fund. This can be wisely used if you need regular cash flows. Therefore, it makes perfect sense for someone who is out of job or retired from the workforce. There are options even under SWP. One can set up SWP to withdraw only capital appreciation portion. This means if have a corpus of Rs. 10 lakh and it has appreciated by 10 per cent or Rs. 1 lakh, an equivalent amount of units will be sold and will be credited to your bank account. This way your capital remains invested and you enjoy gains. It works perfectly when the market is rising, however, when the market starts falling, the problem starts. If you have opted for the withdrawal of only capital appreciation portion, you may not get anything if the market starts falling.
If you are dependent upon these cash flows to meet your daily requirements, opt for a withdrawal of fixed amount. So, a fixed amount will be credited to your bank account after selling the required number of units. The number of units will be more when the market is in a downturn and will be lesser in rising market.
One more advantage of SWP is that it is tax efficient more in case of equity mutual funds as any withdrawal after one year, you need not pay capital gain tax.
Hence if SWP is used wisely it will help you to manage your cash flows in a tax-efficient way.