In today’s time, the importance of an additional or secondary income cannot be understated. To keep up with the living costs even if you are working or retired, you need an extra source of income to work things out. Investing in mutual funds through SWP is a great way to do so. By investing in a lump sum and withdrawing a specific amount periodically, you are sure to generate a consistent income to aid in your day-to-day demands while creating wealth for your long-term plans, including post-retirement.
So, what is a systematic withdrawal plan (SWP)
A systematic withdrawal plan is a facility enabled by mutual funds that allow investors to invest in a lump sum and withdraw a fixed amount of money from their investments. It’s like a SIP but with a difference. Instead of investing in regular intervals like SIP, in SWP, you withdraw the amount. The withdrawal amount can be fixed or variable, which investors can identify through an SWP calculator. The withdrawal frequency is usually monthly, quarterly, or annually.
Here is how you can use SWP for good
There are many ways investors can use the SWP for their benefit. Such as,
- For generating consistent income: SWP allows investors to enjoy a steady source of income from their long term by regularly withdrawing specific amounts. It’s a great help, especially if you need extra money to fund your child’s education, pay EMI, bear day-to-day expenses, or nearing retirement. You can access an SWP calculator online to calculate the withdrawal amount as per your investment and goals.
- For capital protection: If you are an investor who prefers capital protection more than returns, you can invest in low to medium-risk mutual funds and opt for the SWP plan to generate capital gains. Suppose initially, you invest X amount in a mutual fund and withdraw just the appreciation amount. In this case, your initial investment will stay as it is when you generate a steady income from it.
- As a post-retirement cover: If you have reached or nearing your retirement, SWP is the most beneficial option for you. You can invest your retirement corpus in mutual funds. Use an SWP calculator to compare and select the fund scheme based on your risk profile and opt for an SWP to create a post-retirement pension income for yourself that will get transferred to you at a pre-decided frequency.
- For tax exemption, especially for investors with high tax brackets: If you are an investor who falls in the high tax range, investing in mutual funds with SWP can be a wise choice as there is no taxation on the investment. The capital gains from equity and related funds are moderately taxed, and so are debt funds.
Pros of SWP (Systematic Withdrawal Plan)
There are several pros to investing in SWP. Some of them are
- Works with investors’ needs and preferences: With SWP, investors have the flexibility and convenience to choose the withdrawal amount, at a particular frequency and date, according to their needs. They can choose to stop SWP, increase the withdrawal amount, or invest further in the same scheme at any given time.
- Offers you an opportunity to generate additional/regular income: By using an SWP calculator, investors can select the right SWP plan for themselves and enjoy the benefit of consistent income. SWPs are highly beneficial for individuals who need extra income to carry out their day-to-day expenses, especially post-retirement.
- Rupee cost averaging ensures consistent payouts: For making regular payouts, SWP redeems some of the investor’s mutual funds units during each predetermined withdrawal frequency. Such a withdrawal process is unfazed by market conditions. Hence there is no need for constant monitoring of market conditions. If the market isn’t performing well, fewer units get redeemed, and vice versa. But, the process doesn’t stop just because market conditions aren’t favorable. When the withdrawal rate is less than the returns, you enjoy capital appreciation benefits, too.
- Attractive taxation benefits: With SWP, investors get dual-earning benefits through capital gains and withdrawal amounts. The TDS is applicable only on the withdrawal amount. As a result, SWP offers better post-tax gains than its counterparts. With SWP, you can get tax deductions on the long-term capital gain of up to 1 lakh. Gains of above 1 lakh from equity funds get taxed at 15%. In debt funds, if the investment is redeemed before three years, the gains will be taxed according to the investor’s income tax slab. Post three years, a 20% tax is applicable post-indexation.
Investing in mutual funds through SWP can benefit you in the best ways. You get to generate a regular income, save on taxes, and whatnot. With an SWP, you also have sufficient liquidity to access your money according to your needs. With withdrawal amount, you also invest in other investment avenues and multiply your wealth exponentially and fulfill the financial goals you have set for yourself. Make your SWP successful and ensure your finances by planning it using an SWP calculator.