Everyone has different financial needs. Some people want their funds to grow over time. Others need regular income to cover daily expenses. A Systematic Withdrawal Plan (SWP) lets you withdraw a fixed amount from your mutual fund investment at regular intervals. You can choose monthly, quarterly, or annual withdrawals based on your needs.
The amount you withdraw is automatically transferred to your bank account. Meanwhile, your remaining investment stays in the fund and continues to grow. SWP may be suitable for retirees who need a steady cash flow after retirement. It can also be helpful for people with recurring bills or those wanting to supplement their income. This article explains the systematic withdrawal plan to generate regular income.
What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan is an option offered by Unit Linked Insurance Plan (ULIP) and mutual funds. This strategy helps you generate income without affecting your principal investment entirely.
When starting an SWP, you need to consider the following:
The withdrawal amounts
Frequency of the withdrawal
After the withdrawals, the pending funds function according to your investment strategy. You can use SWP calculators to help compute your maturity amount. Also, determine your monthly withdrawals.
Who Should Consider SWPs?
SWPs are often chosen by those who want to have a regular income stream from their investments. Other options like Income Distribution Cum Capital Withdrawal (IDCW) could also be considered. These plans also provide payouts from time to time. However, the payout declaration depends on the fund house's discretion for these plans. So, they do not offer similar predictability as that of SWPs.
SWPs may also be a suitable choice for those who want a disciplined investment approach and who prefer to withdraw funds from their invested savings. When you set up a fixed withdrawal amount, you can avoid overspending.
What are the Features of a Systematic Withdrawal Plan?
The features of a systematic withdrawal plan are as follows:
1. Withdrawal frequency options: You can withdraw monthly, quarterly, half-yearly, or annually. Select one that suits your cash flow needs.
2. Flexible amounts: You can decide how much to withdraw and for how long. Adjust it based on your changing requirements.
3. Residual investment growth: After withdrawing the required amount, your remaining funds stay invested, which continues earning returns even as you withdraw regularly.
4. Tax benefits*: SWPs may be tax-efficient than traditional income tools. This can be especially helpful for long-term capital gains.
5. No lock-in period: Many mutual fund schemes allow SWPs without lock-in periods. The Equity Linked Savings Scheme (ELSS) and certain schemes have mandatory lock-ins, though.
Who should consider SWPs?
SWPs work for different types of investors with varying needs.
Retirees needing regular income
If you've stopped working and need funds for daily expenses, you can consider SWP. It helps create a steady cash flow from your investments. Think of it like a monthly paycheck from your own savings.
Disciplined investors
SWPs keep you on track financially. You decide on a fixed withdrawal amount in advance. This stops you from taking out too many funds at once. It's like setting up automatic bills; once it's done, you follow the plan.
Those seeking secondary income
SWPs can supplement what you earn. These additional funds may help cover rising costs. Medical bills, children's education, or unexpected expenses become easy to manage.
Individuals without pensions
Not everyone has a company pension after retirement. SWPs work like a self-created pension plan. You invest your retirement savings in mutual funds. Then withdraw regular income monthly, quarterly, or as needed.
Note: SWPs are different from traditional pensions. Income and returns are not guaranteed here. What you receive depends on how the market performs.
What is the SWP Calculator
The Systematic Withdrawal Plan calculator is a useful tool. It lets you calculate how much you can withdraw from your investment. The SWP calculator can be helpful when you need to make important financial decisions.
If you are a retiree, this calculator can be used to plan your income. You can decide and choose periodic withdrawals as per your needs. The calculator takes into account multiple factors. These include the investment time horizon, the current value of the portfolio, and the desired withdrawal amount.
The SWP calculator can determine the amount of money you need to save every month. This helps in getting the desired monthly income in retirement.
How do the SWP Calculators work?
When it comes to choosing a SWP, you may not have to get into manual calculations. An SWP calculator can help with the calculations instantly. You need to know the following:
The total withdrawal
Amount of investment
Withdrawal frequency
To calculate the final value, you need to multiply the amount withdrawn each year by the years of return.
Given below is a step-by-step instruction for using an online SWP calculator:
Input the full investment amount
Input the per-month withdrawal.
Select the anticipated rate of return.
Type in the required time
Select 'Calculate'
Once you add all the necessary details, the result will be displayed instantly.
Conclusion
A Systematic Withdrawal Plan helps you generate regular income from your mutual fund investments. You withdraw fixed amounts at chosen intervals. Your remaining investment continues to earn potential returns. SWPs can be suitable for retirees needing steady cash flow and individuals without company pensions. Additionally, an SWP calculator can help you plan withdrawals based on your investment amount, expected returns, and time period. Always consider your income needs and risk appetite before setting up an SWP.
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