3 Reasons Why A Smart Investor Should Opt For SWP   May 02, 2017

Akash and Simran moved to Mumbai in 2005. Akash, an engineer, works with an IT conglomerate, and his wife works as a strategic consultant at a multinational company.

The first thing Akash does when his salary is credited, is transfer a sum to his parents' bank account as a part of their monthly expenditure. Many of you living miles away from your family would relate to this responsibility.

Last month, he earned a promotion and received a hefty bonus of Rs 5 lakh. He plans to save this amount for his parents in a way that eliminates transferring money monthly to their account. He has chosen to utilize the fixed deposit with monthly interest payment facility.

Isn't that the simplest and most hassle-free way of saving for your parents? Most of you would do the same, however by doing this your money is not inflation proof —meaning, it'll be insufficient to meet the rising cost of living and soon would lose its value. You may be unable to fulfil many of your aspirations or goals, if it doesn't counter inflation effectively.

So, to beat the inflation bug you need to invest in a productive investment avenue, and mutual funds is one of them. If you wish to address monthly financial needs of your parents as what Akash does, Systematic Withdrawal Facility (SWP) can be the answer.

Under SWP, you, the investor, are facilitated to withdraw a fixed sum of money from a mutual fund scheme regularly (say monthly, quarterly, half-yearly and annually) and hold the potential to clock returns on the remaining investments over a period of time.

The UTI mutual fund house recently introduced the UTI Family (Father and Mother I Love You) facility under growth option of its existing schemes: UTI MIS Advantage Plan and UTI Wealth Builder Fund. "UTI Family" offers an investment route to the children to monetarily take care of their elderly parents. It is a facility where children can plan fixed withdrawals every month (1st business day of every month). This facility is available to both existing as well as new investors. The amount withdrawn vide SWP will be credited to either of your parent's account.

Let us go in deeper and understand the advantages of Systematic Withdrawal Plan (SWP):

  1. Rupee Cost Averaging

    Let us assume Akash invests Rs 5,00,000 in Fund A. If the net asset value (NAV) of the fund is Rs 100, then he will hold a total of 5,000 units.
    Month Cashflows NAV Fund Units Value
    Jan 5,00,000 100 5,000 5,00,000
    Feb -10,000 103 4,903 5,05,000
    Mar -10,000 102 4,805 4,90,097
    Apr -10,000 105 4,710 4,94,511
    May -10,000 108 4,617 4,98,641
    June -10,000 106 4,523 4,79,407
    Note: The above table is for illustration purpose only
    (Source: PersonalFN Research)

    Assuming his parents need a monthly sum of Rs 10,000, if he withdraws Rs 10,000 under SWP, his holdings will decline to 4900 units (i.e. Rs10000 / Rs100 NAV = 100 units are reduced from his initial holdings) in the first month.

    Now the NAV of the fund has appreciated to Rs 101 due to market dynamics. The number of units equivalent to Rs 10,000 i.e. only 99 units would be sold (i.e. Rs 10000/ Rs 101 NAV = 99 units).

    In five months, when Akash withdraws a total of Rs 50,000, his effective portfolio would value Rs 4,50,000. However, his total value is now Rs 4,79,407; effectively proving it as a better earning instrument vis-à-vis traditional fixed deposits due to market dynamics.

    In short, due to rupee-cost averaging under SWP, you'll turn benefit even when you withdraw. Hence, you earn even on your spends.
  2. Taxation Benefits

    Another big advantage of SWP is that it becomes tax efficient for investors.

    Any gain on sale of equity mutual fund units held for less than 1 year attracts a short-term capital gains tax of 15%. However, your withdrawals with SWP will be in a smaller amount and in the first year, it will be your principal amount. Hence, it will not attract STCGT in case you withdraw via SWP.

    In case of debt funds, short term is defined as 3 years and any profit made within this duration is classified as a Short Term Capital Gain (STCG) and will be taxed as per your income-tax bracket (i.e. marginal rate of taxation). And Long Term Capital Gain (LTCG) i.e. investments held for a period of more than 3 years, at 20% tax rate with indexation.

    Hence, when you withdraw through SWP, your tax liability reduces to a great extent.
      Lump Sum Withdrawal Systematic Withdrawal Plan
    Month Cashflows NAV Fund Units Value Cashflows NAV Fund Units Value
    Jan 5,00,000 100 5,000 5,00,000 5,00,000 100 5,000 5,00,000
    Feb - 103 - - -10,000 103 4,903 5,05,000
    Mar - 102 - - -10,000 102 4,805 4,90,097
    Apr - 105 - - -10,000 105 4,710 4,94,511
    May - 108 - - -10,000 108 4,617 4,98,641
    June -60,000 106 4,434 4,70,000 -10,000 106 4,523 4,79,407
    Note: The above table is for illustration purpose only
    (Source: PersonalFN Research)

    Like in the case study above, even if Akash withdraws Rs 10,000 every month, the total in six months is Rs 60,000 which is part of his initial investment. The value of his total investments would be Rs 4,70,000. Whereas, if he withdraws systematically through SWP then the total value of his fund would be Rs 4, 79, 407.
  3. Disciplined Withdrawal and Fixed Income

    SWPSs can be an effective way to bring discipline with saving and provides you with a fixed income at regular interval. This can be a beneficial avenue for senior citizens and retired individuals who require a fixed income monthly from their investments.

To Sum-up…

SWPs can be used as a means to source your monthly expenses or retirement planning . It will not only provide you with a fixed source of income but also a disciplined approach to spending. Rupee-cost averaging would work in your favour when you withdraw systematically. But remember, to withdraw you also need to invest, to ensure your long-term financial goals can be met — retirement being the most important for one of all

Like Akash, if you receive a lump sum amount by the means of say bonus, variable pay, incentives or provident fund, etc. You can deploy this amount for your retirement and child's future, rather than splurging money on things you actually don't need.

Add Comments

May 15, 2018

There is a small error in the example cited. If he withdraws 60000 in 6 months only 440000 will be left and not 470000 as you had mentioned.