Saturday, April 16 2022
Source/Contribution by : NJ Publications

As informed investors, we should be familiar with the different investment routes or facility of investing offered by mutual funds. You may already be aware of SIP but likewise, there are also other facilities offered by mutual funds to invest, redeem or switch between investments, which are relatively unknown.

We have explored the SWP in one of our previous issues. This month, we would be exploring the STP or Systematic Transfer Plan in detail.

Thanks to the consistent marketing efforts by the industry, today SIP or Systematic Investment Plan have become a familiar term for investors. More people are now beginning to explore the savings route through SIPs. But as an investor, one should know that SIP is just one route or facility of investing. Likewise, there are also other facilities offered by mutual funds to investors to invest, redeem or switch between investments, which are relatively unknown. We shall be exploring these facilities in detail in the future newsletter issues. In this issue, we will talk about Systematic Withdrawal Plan or SWP.

What is SWP?

A SWP is a facility that allows an investor to withdraw money (redeem units) from an existing mutual fund scheme at defined time intervals. Thus, the SWP is something opposite or reverse of a SIP where periodic investments are made into the scheme. The SWPs are used by investors to create a regular flow of income from their investments for meeting various life objectives.

SWP Options:

There are certain additional options offered by mutual funds within SWP. As far as time intervals are concerned, the frequency options generally available to withdraw are on monthly, quarterly or annual period basis. In terms of the nature/type of withdrawal possible, investors normally have two options to choose from...

Fixed Withdrawal: Wherein specific amount of money can be withdrawn.
Appreciation Withdrawal: Wherein amount of appreciation only can be withdrawn.

Ways how you can use SWP in your lives:

SWP can help meet your cash-flow requirements for achieving any temporary or long term objective. It is one of the many ways available for planning regular income from savings. The following real life situations can help you realise the ways in which SWP can be planned

  1. Mr. Amitabh will be retiring very soon. Post retirement he wants a steady income flow into his account.
  2. Mrs. Kavita plans to take a break from work for a year to bring up her first child. She is exited and wants a steady inflow from her investments during this period.
  3. Mr. Kishore has recently married and wants to create a perpetual cash flow for his wife while keep investment capital intact.
  4. Mr. Banerjee is planning an investment in his son's name with regular withdrawals to fund his regular pocket money and tuition fees needs.

As we can see, SWP can be a very powerful facility which can be used smartly to meet your cash flow needs. It can potentially play a very critical role as part of a holistic financial planning for your family.

SWP: Tool for Investment Strategy

There are specific ways in which SWP can be smartly used to manage your wealth as well as cash flow requirement. If we can carefully manage the amount of SWP with the returns or appreciation expectation, we can strike a smart balance between periodic cash flow on one hand and capital appreciation/ reduction on the other hand. For financial planners, its a great tool to play with...

Stategy 1: Regular cash-flow keeping Principal Intact:

This is the simple strategy where the the option of 'appreciation withdrawal' is exercised for SWP. Thus, the withdrawal amount changes to adjust for the “appreciation” or gain made on the amount invested. In this way your capital stays invested while you continue to enjoy the gains periodically.

For example: Amount Invested R5 lac. Expected returns 9%. Monthly withdrawal option: Appreciation only meaning any amount over 5 lac will be to the investor on the selected periodic intervals. The main investment remains intact.

Strategy 2: Creating Perpetual Cash-flow:

This is the advanced version of strategy, wherein a 'fixed' withdrawal amount is kept lower than the expected returns or appreciation. So if expected returns is say 9%, you will be withdrawing below 9% every year. This way, a perpetual cash flow is ensured with lump-sum capital staying intact.

For example, if scheme “X” : Amount Invested R5 lac. Expected returns 9%. Monthly withdrawal: R3,000/- short of 9% yearly. This would create a perpetual cash flow of R3,000/- with invested capital staying intact or increasing slightly. An extension to this strategy is that if you have a big investment capital and mush smaller withdrawals, you may be able to increase your withdrawal amount every year and still continue to enjoy outflow for a longer period of time. A real life scenario for such a case would be retirement where the growing annuity would be needed to adjust for inflation. The other option would be to keep withdrawal constant, then you would be able to increase the value of your investment.

Comparison with other products:

Let us now compare the SWP option with some of the other products in market which offer regular income option.

Product Maximum investment Return Maximum Monthly Income Maturity Taxation
Senior Citizens Saving Scheme - SCSS 15 lakhs 9.2% Rs. 11,500/- 5 years + 3 years As per tax slab.
Post Office Monthly Income Scheme - PO MIS 4.5 lakhs (single) 9 lakhs (joint) 8.4% Rs. 3,150/- (single) & Rs. 6,300 (joint) 5 years As per tax slab.
Mutual Fund SWP None Market driven None None Depends on scheme type
Scheme Type Dividend
Tax (DDT)
Debt / Liquid / Money
Market Schemes
28.325% effective Tax Slab 10% or 20% with
Equity Schemes Nil 15% Nil

Unfortunately, looking at the above comparisons, we can confidently say that there is not enough savings products or options available that is worth comparing to the SWP option in a mutual fund scheme. The popular SCSS and POMIS products may offer fixed returns but they also have limitations in terms of amount, period, mode of holding along with the inconvenience and operational hassles. Mutual funds which also offer debt and money market schemes can potentially deliver better post tax-returns, in addition to the many other advantages.

Way forward:

Times are changing. As investors, we need to take efforts to understand the options /facilities available to us and be open to incorporating these ideas to manage our wealth and our lives in a better way. SWP is one strategy that really helps you meet your consumption or cash-flow needs. Perhaps SWP is as important a tool for managing redemption or withdrawal of money as SIP is important for investing. We hope, the next time you are thinking of withdrawals, the idea of SWP shall cross your mind.

Imp.Note: We are registered NJ Wealth Partners and this interview published is sourced from NJ Wealth with due permissions. Reproduction of this interview/article/content in any form or medium by any means without prior written permissions of NJ India Invest Pvt. Ltd. is strictly prohibited.
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