How To Use Systematic Withdrawal Plans to Meet Your Income Needs?

Similar to Systematic Investment Plans (SIPs) that allow investors to periodically invest an amount in a mutual fund scheme, SWPs allow investors to withdraw amounts regularly. This proves to be a safer route as investors limit their liquidity risk. They do not need to risk redeeming all their units during a market trough. Assuming the scheme is profitable, the re-purchase ensures that some of the profits are being regularly encashed by the investor.

Let us assume that a mutual fund investor wishes to redeem units worth Rs. 10,000 per month for the next 12 months. If in the first month, the NAV of the scheme was Rs. 200 per unit. Thus, the investor’s unit-holding shall be reduced by 50 units. In the second month, let’s say the NAV of the scheme has increased to Rs. 250 per unit. In this case, the investor’s unit-holding shall decline by fewer units- 40.If the NAV reduces to Rs. 100 per unit in the following month, the unit-holder shall be offering 100 units for sale. Thus, the investor ends up selling a higher number of units when markets decline, thus achieving rupee-cost averaging for his redemption. Investors are not stuck in an unfortunate position of exiting all units when markets decline.

Such systematic approaches promote investment discipline, which is useful in long-term wealth creation and protection. SWPs allow investors to structure a regular cash inflow from their investment account into their bank account. Investors can select the frequency of their withdrawals as per their convenience- monthly, quarterly, etc. The most popular and widely selected method is monthly withdrawals.Some schemes also offer the facility of transferring only the appreciation or the dividend. In this option, the withdrawal is not fixed but will vary depending upon the availability of capital appreciation or dividend received under the scheme. The advantage of a variable SWP relative to a fixed amount of withdrawal is that the capital invested will not be withdrawn.

There are a host of factors that go into selecting a mutual fund scheme. If you are open to taking risks, you can select an equity-oriented scheme for meeting your income needs. Conversely, if you are a risk-averse investor, you may consider a debt-oriented scheme which is usually considered to be a safer bet.However, if you fall in the middle of the spectrum and are neither risk-aggressive nor opposed to taking risks, hybrid or balanced funds would best meet your financial goals. In Conclusion Thus, by opting for an SWP, the investor shall instruct the mutual fund to directly repurchase or redeem the appropriate number of units of the unit-holder and automate his income flow.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.