Follow These Steps to Set Up an SWP in Mutual Funds

To which I replied, "Uncle, post-retirement, you will not have a regular source of monthly income. To overcome this, many retirees consider investing their retirement corpus in various investment options that offer regular income. This includes interest income from Fixed deposits, Post office scheme, Senior Citizen's Saving Scheme (SCSS) and Systematic Withdrawal Plan (SWP) option in mutual funds."

"As you know, SIP helps tide over market volatility and provides a hedge against inflation by investing regularly in pre-defined intervals. Systematic withdrawal plans (SWPs) are, in a way, the reverse of SIPs. In an SWP, instead of investing in the fund, the investor redeems a fixed amount from his investment on a predetermined date every month."

Let us understand the functioning of a Systematic Withdrawal Plan (SWP) in detail...

What is a Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan or SWP allows you, the investor, to withdraw systematically on predefined dates from your mutual fund investments. It could be made monthly, quarterly, semi-annually or even annually. The withdrawals could be a fixed or a variable amount. SWP allows you to withdraw your mutual fund investments in a periodic fashion, and it is the most effective way to draw regular income post-retirement.

This way, you are in better control of your investment for your liquidity needs and do not have to depend on dividends that aren't guaranteed. The remaining investment in your mutual fund scheme would generate returns for you. Thus, what SWP does is facilitate piecemeal withdrawals. On each withdrawal, the value of your investment in the fund is reduced by the market value of the units that you have withdrawn, and the remaining mutual fund units clock returns for you.

Uncle Rajeev replied, "This sounds like a worthy investment option, but as mutual funds are market-linked, do you think it is appropriate to invest in avenues that carry market risk post-retirement?"

To which I responded, "Uncle, it is crucial to be prudent about deploying your retirement corpus, and do note that you should not take any unwanted risks after retirement. However, only after assessing your complete financial situation, risk appetite, and investment horizon one can decide whether you should invest in a mutual fund and set up a Systematic Withdrawal Plan(SWP) to draw a regular income."

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How retirees can benefit from the SWP option?

SWPs are especially useful for retirees who are looking for a fixed stream of income. Regardless of whether you have a pension plan or not, if you plan to invest your lump sum retirement corpus in an SWP option, you can create your pension or a regular income source.

• SWP, if planned well, allows you to customise the flow of income at pre-defined intervals and amounts. Retirees have access to liquidity (access to your money invested in the mutual fund scheme) with definite regular income, irrespective of the market fluctuations.

• SWP helps you maintain a disciplined approach towards withdrawals; it assists you in steering clear of withdrawing large amounts due to panic during market corrections.

• SWP helps preserve wealth for future expenses; as you withdraw in pre-defined intervals, the remaining balance amount clocks return for you.

• SWP Facilitates rupee-cost averaging and counters inflation with the balancing units, earning you decent returns.

SWP, according to experts, protects investors against the downside risk of market volatility while also avoiding timing the market. Another reason why SWP is a wise investment strategy for retirees is these withdrawals, which are effectively redemptions, are not subject to tax deductions at source (TDS). The capital gains, though, are taxed on the withdrawn amount.

Keep in mind that the SWP option will differ depending on whether you have chosen an equity-oriented or debt-oriented mutual fund scheme. Depending on the holding time for the scheme, it would be subject to Short-Term or Long-Term Capital Gains Tax.

Following are the steps to set up a SWP in the mutual fund scheme of your choice:

Step 1: Define your investment amount; for instance, Uncle Rajeev plans to invest Rs 5 lacs in a mutual fund scheme which holds an NAV of Rs 20 with an SWP option; thus, 25000 units will be allotted to him.

Step 2: Investors should consider the SWP option in mutual fund schemes based on their suitability and risk profile. Risk-averse retirees can choose to invest their corpus in debt funds if they are not comfortable with equity market volatility. Do note that tax implications for equity-oriented and debt-oriented mutual funds vary.

Step 3: After you've decided on a mutual fund scheme, you'll need to choose a pre-determined interval, such as monthly, quarterly, or annually, with a date, for when you can withdraw money from your mutual fund investments.

Step 4: The next step is to establish a fixed amount or rate of withdrawal on your mutual fund investments. SWP allows you to withdraw a set percentage or certain amount each month, quarterly, or yearly. The rate of withdrawal should be sufficient to cover one's expenses. You can revisit your cash flow requirements periodically due to changes in lifestyle, life goals, and inflation.

Considering the above-mentioned case, for instance, if Rajeev plans to redeem Rs 1 lac in the month of June from the mutual fund scheme where he invested Rs 5 lacs. Total 5,556 units are redeemed and 19,444 units are left at the value Rs 3,49,992. (19,444 X 18).

However, when Rajeev withdraws from the same scheme via SWP of Rs 20000 for 6 months, you can see that he gains more as compared to lump sum withdrawal due to rupee cost averaging in SWP.

As seen in the above example, unit balance reduces overtime in the SWP plan, but if the scheme's NAV appreciates at a percentage higher than the withdrawal rate, the overall investment value appreciates.

Step 5: Ensure that all necessary information, such as the withdrawal rate or amount, and the pre-determined withdrawal date, is included. Also, make sure your bank account is linked to receive your SWP amount on the desired date as a regular income.

Given that, SWP is a smart approach for retirees who are seeking for a regular stream of income. An SWP can also be set up to withdraw only the capital appreciation portion. The good part is that the returns are tax-efficient, and there is no TDS on gains, unlike traditional investment options.

To conclude...

A Systematic Withdrawal Plan (SWP) can be utilised by those who are planning for their retirement in the coming years or have retired. To get efficient inflation-adjusted returns, choose a worthy and suitable mutual fund scheme via the Systematic Withdrawal Plan (SWP) option to maintain liquidity for your retirement expenses.

Your retirement corpus is your hard-earned money, and allocating it to worthwhile investment avenues with suitable asset allocation based on your risk tolerance and cash flow needs is equally important for many retirees. As a result, you must choose investment options that will allow you to generate significant returns and provide a steady income stream post-retirement.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst