After a career in banking that spanned across four decades, Sanjay, now approaching his sixties, is contemplating retirement. Being financially savvy, the seasoned banker has parked his funds in a variety of investment options. And mutual funds contribute to a majority of his financial investment portfolio. With his post-retirement phase fast approaching, Sanjay realizes that he needs a steady stream of income to make the transition to his golden years easier. Also, noticing that the assets in his mutual funds are performing extremely well currently, Sanjay is hesitant about withdrawing his investment entirely at such a lucrative juncture.
So, here’s what he plans to do. Instead of withdrawing his money entirely, at one go, Sanjay opts to withdraw his corpus systematically, over the course of several months. In other words, he has decided to adopt a Systematic Withdrawal Plan (SWP) to support his mutual fund withdrawals.
You can make use of this mutual fund withdrawal plan to support yourself after retirement, like Sanjay did. Alternatively, you could also leverage an SWP to meet various life goals or to supplement your primary income. If you’ve never heard of an SWP before, getting back to the basics can help you better understand this strategy for mutual fund withdrawals.
What is a Systematic Withdrawal Plan?
A Systematic Withdrawal Plan is a disinvestment strategy that allows you to redeem your mutual fund units in a phased manner, as opposed to a lump sum sale. Effectively, you withdraw your investments and earnings in instalments, thus generating a regular stream of income.
An SWP is the diametric opposite of an SIP (Systematic Investment Plan), wherein you invest in mutual funds in instalments. In an SIP, you move funds from your savings into your preferred mutual fund scheme, while in an SWP, you move funds from your mutual fund investments into your savings account. Just like how investing in mutual funds is easy on the Moneyfy app from Tata Capital, withdrawals are also simple and straightforward on the app.
How does this mutual fund withdrawal plan work?
To execute an SWP, you need to withdraw some part of your investment at periodic intervals. The withdrawals can be made on a monthly, quarterly, or annual basis, depending on whatever works best for you. When you withdraw money from your mutual fund investment, you effectively need to sell off or redeem some of the units you hold. The number of units you need to sell depends on the NAV on the date you make your withdrawal.
Making systematic withdrawals using an SWP allows you to take advantage of rupee cost averaging. Let’s look at an illustrative example to make this clearer. Say you require Rs. 5,000 five months from now. You could withdraw Rs. 1,000 systematically each month.
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Systematic Withdrawal Plan
|Month||Cashflow (in rupees)||NAV (in rupees)||Number of units redeemed (cashflow/NAV)||Units left in the fund||Fund value after withdrawal (units left x NAV) (in rupees)|
|June||(1,000)||15||67 (approx.)||644||9,660 (approx.)|
So, you see how you systematically redeem a different number of units each month to obtain your required cash flow? The withdrawal amount can be fixed, as seen in this example, or you could only choose to withdraw the earnings portion, leaving your capital intact.
What is the need for a Systematic Withdrawal Plan?
The need for an SWP varies from one investor to another. For many people like Sanjay, this mutual fund withdrawal plan can be used to provide a regular stream of income for a brief period, making the transition to retirement easier. For other younger investors, an SWP could help in achieving financial goals in a timely manner.
This is particularly true if you have invested in mutual funds in order to achieve specific objectives, such as creating a corpus for the down payment on your home. You could structure an SWP to meet these cash requirements in a timely manner without losing the benefits of favorable market movements.
So, you see, SWPs can help investors at varying stages of life meet different goals. You too can set up a SWP to meet any immediate financial requirements, if you need to. Alternatively, you could phase out of your investment using this mutual fund withdrawal plan as you near your retirement age, like Sanjay did.
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To get a better idea of your returns over the course of your mutual fund withdrawals, you can make use of online SWP calculators to know how your earnings and your investment changes with each withdrawal. This way, you can make a more informed decision about your disinvestment. Withdrawals are extremely easy on the Moneyfy app, which is quick, responsive, and built to be highly user-friendly. Download this app to make your mutual fund investments, transfers, and withdrawals easier.