Do benefit-risk analysis before saying Yes to Systematic Withdrawal Plan
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In times of constant innovation in the financial services space, you could see new products entering and the older ones getting phased out from the market. One of the very new mutual fund products to have emerged in recent times is Systematic Withdrawal Plan (SWP). It is gradually becoming the choice of investors seeking a steady income from their investments on a monthly basis. SWP enables investors to withdraw a fixed sum of money from their investment on the same date of every month for a designated tenure.
Going by the name, SWP gives investors the choice to withdraw a fixed amount on a fixed date each month from their investment corpus. Systematic Withdrawal Plan is exactly the reverse of Systematic Investment Plan (SIP) where investors park a fixed sum each month. With SIP, you can withdraw the money based on your preferred choice. It can be done monthly, quarterly or yearly.
For instance- Ravi has 5,000 mutual fund units and the Net Asset Value (NAV) of each unit is Rs 25, then the overall investment of Ravi comes out to be Rs 1,25,000. If Ravi seeks a monthly income of Rs 8,000 through SWP, then the number of units withdrawn is 320 (8000/25). The balance 4680 units would now be available at Rs 1,17,000 (4,680×25). On withdrawal of a fixed sum of Rs 8,000 every month by Ravi, the NAV of the mutual fund units would also rise in accordance with market conditions. If the NAV rises to Rs 26.50 per unit in the second month, the number of units required to withdraw Rs 8,000 would thus reduce to 302 approximately. The balance 4378 units would then be available at Rs 1,16,017 (4378×26.50). On withdrawal of Rs 16,000 in two months, the balance should have been Rs 1,09,000. But, with SWP, the balance comes out to be Rs 1,16,017, a gain of Rs 7,017.
Fixed Withdrawal– With fixed withdrawal variant, you can withdraw a fixed sum of money at predetermined intervals. You can withdraw a sum of say Rs 5,000 from an investment of Rs 3 lacs each month.
Appreciation Withdrawal-With this variant, one can withdraw only on the overall appreciation value of the actual fund. For example-If you have made an investment of Rs 5 lacs and enjoy a return of 10%, then the withdrawal will be allowed only on Rs 50,000, with the capital invested being kept intact.
• Firstly, no tax is deducted at source with SWP. Secondly, your overall tax liability reduces significantly compared to a dividend scheme, which attracts Dividend Distribution Tax (DDT) ranging from 12.5% to 25% across different mutual fund categories such as balanced funds, debt funds, liquid funds, money market funds. Profit earned by selling of mutual fund units via SWP attracts tax rate of 10% without indexation and 20% with indexation. Indexation helps adjust the purchase price of the mutual fund units as per the prevailing inflation. Tax liability here will be much lower than the interest earned on fixed deposits of banks.
• SWP can be of a great help for investors who want a fixed monthly income from their investments. Senior citizens can avail this scheme to their advantage by using it to get a fixed sum each month from their investment instead of depending on dividends that can change as per varying market conditions.
• SWPs enable inflationary corrections, which mean that the funds normally generate more returns on the rise in inflation. This will help effectively deal with the inflationary pressure.
• Being highly liquid in nature, SWPs allow you to withdraw a large sum of money whenever required. You can sell off some units and get your funding requirements met.
• SWPs are subject to market volatility risks. In case of market plunge, the returns could deteriorate. However, some funds perform well during the downfall. So, keep an eye on the present and past performance before opting for a fund.
• These plans are not suitable for small investments as the returns won’t be high and thus the withdrawals on a monthly basis can be extremely low or may take out the entire chunk of investment.
• Being liquid in nature can present both advantages as well as disadvantages. We already knew the advantage part earlier. The disadvantage is that when shares get sold off for addressing emergency fund needs, less fund remains for investment and thus the annual return decreases. As the return falls, your withdrawal requirements from fixed and appreciation variants won’t be fulfilled as the invested capital gets over soon.
Now, you have the information to decide whether it is worthwhile adopting Systematic Withdrawal Plan or not. Do a proper analysis on the benefits and risks involved before availing SWP.