Introduction
When considering mutual fund investments, it is important to understand two key concepts – Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs). SIPs are a popular approach for investing in mutual funds, while SWPs are used for redeeming them. In this piece, we will explore the benefits of SWPs and their potential advantages for investors.
What is a Systematic Withdrawal Plan?
The Systematic Withdrawal Plan (SWP) is a convenient option for investors looking to redeem their mutual fund investment over time. Rather than withdrawing the entire amount at once, the SWP allows for gradual redemption through installments.
What makes this facility stand out is the flexibility it offers in terms of choosing the withdrawal amount and frequency. Moreover, you also have the choice to preserve your initial investment and only withdraw the profits made by the fund.
How does a Systematic Withdrawal Plan work?
Now that you’ve seen what a Systematic Withdrawal Plan is, let’s take a look at a hypothetical example to better understand the concept.
Assume that you invested Rs. 1.5 lakhs in an equity mutual fund in 2020. The NAV at the time of investment was Rs. 100 and the total number of units purchased was 1,500.
As a result, you decide to utilize a Systematic Withdrawal Plan for redeeming your mutual fund investment by withdrawing Rs. 25,000 every month until the entire amount is redeemed. Here is an overview of how your withdrawals will be executed based on your chosen Systematic Withdrawal Plan.
Here’s how the withdrawals would go according to the Systematic Withdrawal Plan that you opted for.
Month | NAV | Amount of Withdrawal | Units Redeemed | Units Remaining | Value of the Fund |
January | Rs. 150 | Rs. 25,000 | 167 | 1,333 | 1,99,950 |
February | Rs. 145 | Rs. 25,000 | 172 | 1,161 | 1,68,345 |
March | Rs. 148 | Rs. 25,000 | 169 | 992 | 1,46,816 |
April | Rs. 152 | Rs. 25,000 | 164 | 828 | 1,25,856 |
May | Rs. 155 | Rs. 25,000 | 161 | 667 | 1,03,385 |
June | Rs. 160 | Rs. 25,000 | 156 | 511 | 81,760 |
July | Rs. 156 | Rs. 25,000 | 160 | 351 | 54,756 |
August | Rs. 150 | Rs. 25,000 | 167 | 184 | 27,600 |
September | Rs. 147 | Rs. 25,000 | 170 | 14 | 2,058 |
October | Rs. 145 | Rs. 2,030 | 14 | 0 | 0 |
As a result of the NAVs’ frequent changes, the remaining funds’ value varies monthly. As evident by the 10th month, you have successfully redeemed all your units in a systematic manner.
Benefits of Systematic Withdrawal Plan
In addition to the flexibility and freedom that it offers, the Systematic Withdrawal Plan comes with plenty of other benefits as well. Let’s take a brief glimpse at a few of them.
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Regular Income
By utilizing the SWP option, you can secure a steady stream of income. This can serve as an additional source of funds to assist with routine expenditures. For example, it can contribute towards your rental payments, thereby reducing your financial strain. Alternatively, you may opt to place the income into a low-risk investment vehicle such as a bank RD.
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Perfect For Retirement
For retirees, lacking a steady source of income can make managing monthly expenses challenging and possibly lead to financial struggles. However, choosing a Systematic Withdrawal Plan can provide a consistent flow of funds to cover lifestyle costs.
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Future Capital Appreciation
By redeeming all the units in a mutual fund, you miss out on any potential future increase in its net asset value (NAV). However, with a systematic withdrawal plan (SWP), only a small portion of the total units are sold each month, allowing the remaining units to benefit from any future NAV growth.
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No Tax Deducted At Source
As a resident individual investor, rest assured that you won’t be subject to TDS (Tax Deducted at Source) for any funds received through a Systematic Withdrawal Plan. This is a great advantage as it won’t contribute to your tax obligations.
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Capital Protection
SWP allows for redemption of only the fund’s past gains, while leaving your original investment protected and untouched. The remaining capital will continue to grow through future NAV increases.
Conclusion
The Systematic Withdrawal Plan is an excellent tactic for investors seeking a stable income. In addition, it allows you to save on taxes, as there is no TDS required for SWP redemptions. If you have not yet ventured into mutual fund investments, now may be the ideal opportunity to do so.
However, please note that to invest in a mutual fund, you must first open a demat account. Thankfully, EquityBox offers a convenient option of a free 2-in-1 trading and demat account which can easily be applied for online from the comfort of your own home. Once your account is set up, you can proceed with investing in a mutual fund or even explore upcoming IPOs.