Systematic Withdrawal Plan (SWP)- If You Wish To Further Grow Your Retirement Corpus
Written on Thursday, March 16, 2017
By Mitali Sharma
Mr. Verma has retired and he has his retirement corpus with him. He needs some part of his corpus to meet his lifestyle expenses but he also wants his corpus to grow further. He understands that keeping the money in his saving accounts is not a good option because in that way his money will not grow, rather its value will diminish in adjustment against the inflation. Also, he understands that FD rates are falling and thus it again won't help his money to grow much.
As a solution to his needs, a typical advisor has recomended him to go for Mutual Fund Investments with dividend option. Although, Mr. Verma sees Mutual fund investments as a promising option for wealth creation but he doesn't see the dividend option as an effective solution for his requirement of regular cash-flow because dividends are not guaranteed and he cannot rely on these to take care of his monthly expenses.
Mr. Verma is confused about what to do?
The all-inclusive solution for Mr. Verma is Systematic Withdrawal Plan (SWP).
Not just Mr. Verma, but many people, especially the retirees, are confused about how to best utilize their retirement or investment corpus. In a nutshell, they want some liquid money to meet their daily expenses and rest they want to invest so that they can create more wealth.
Mutual fund Investments through Systematic Withdrawal Plan (SWP) is the right investment avenue for them. SWP gives you dual benefits, it gives you a source of regular income, and at the same time it gives your money the power to grow by keeping it invested in Mfs.
More Information on SystematicWithdrawal Plan (SWP)
In SWP, you invest a lump sum in Mutual Funds, and then you withdraw a certain amount from your MF investment at a predefined frequency, which can be monthly or quarterly. As an investor, you have two options available for withdrawing your money.
1. Fixed Amount Withdrawal: Here, on each SWP withdrawal date, you will withdraw a fixed sum of money. For example, if you have invested a corpus of Rs. 5, 00,000 in MF through SWP, then under this option, you will be withdrawing a fixed amount, say Rs. 5000, each month.
However, under this option, while withdrawing your monthly amount, you might bother your 'Capital' amount as well, means if your withdrawal amount is more than your capital gain for that month, then the withdrawal will be made using your 'Capital' amount.
2. Capital Gain Withdrawal: Here, you will withdraw only the 'Capital Gains.' For example, if you have invested Rs. 5, 00,000 in an MF portfolio, and on your SWP withdrawal date, your money has grown to Rs. 5,02, 000, then you will be able to withdraw only Rs. 2000, i.e your capital gain for that particular month. This option keeps your 'Capital' intact and it continues getting invested in MF to earn you further capital gains. Likewise, if next month, your 'Capital' money grows to Rs. 5,03, 000, then you will withdraw Rs. 3000 only.
In a nutshell, the first option allows you to withdraw a fixed amount each time but it may bother your 'Capital' investment, if you consume more than your capital gains. The second option may not give you a fixed withdrawal amount each time, but it will keep your 'Capital' investment intact.
How To Do SWP?
The right way of doing Systematic Withdrawal Plan (SWP) is to invest your corpus in a way that it can earn more than what you are consuming. To achieve this, you must deploy your corpus among right kinds of funds such as Short Term Funds, Dynamic Bond Funds or Balanced Funds and pure Equity Funds. You can also take up the strategy of dividing your corpus in the ratio of 70:30 between debt and equity. Finally, you should definitely check the taxation of your withdrawal amount and should try not to bother your 'Capital' investment in a big way.
Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing