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Systematic withdrawal plans help you redeem a fixed sum at given intervals from your portfolio
Thanks to the publicity that systematic investment plans (SIPs) have received, a large number of investors are aware these schemes, which allow one to invest in a regular and disciplined way. However, the other side of this investment spectrum, the systematic withdrawal plans (SWPs), which help you redeem part of the portfolio over the years, are not as popular.
As an investor, through an SIP you invest a pre-fixed sum of money at regular intervals — monthly or quarterly — to buy some units of a mutual fund scheme depending on the NAV of the scheme. In a SWP, investors redeem some units of the fund from their portfolio to get a fixed sum of money at a pre-fixed interval. In an SIP, you get higher numbers of units when the markets are down and lesser in a buoyant market. In contrast, a SWP gives you higher number of units when the markets are down and lesser number of units when the markets are rallying. This is because the amount you want to withdraw is fixed. Another variety of SWPs is where rather than withdrawing a fixed amount at regular intervals, investors take out the profit that is made over a pre-fixed time interval.
Fixed SWPs: Under this route, you have to specify the amount you want to take out from your portfolio. You also need to specify the time interval — monthly, quarterly, half-yearly or yearly. For example, if you have to pay for your child’s monthly tuition fees, you could opt for a monthly SWP with the tuition fee as the fixed amount.
Appreciation SWP: You can decide to withdraw only the appreciation on your investments. Here, the amount that you can receive at each interval would vary, since that depends on the amount of appreciation. But this will also leave your initial capital unchanged. According to financial planners and advisors, appreciation SWPs are useful when you want to book profit on your investments.
Financial advisors say that while SIPs are always the preferred investment route for equity investments, SWPs work better in case of debt funds. Usually, the rule of thumb for investors is that while you build a corpus by investing in the equity funds over years through the SIP route, to enjoy that money the investor should use the SWP route.
Often financial planners and advisors suggest that investors should combine an SWP with a Systematic Transfer Plan (STP), which can bring in added advantages. STPs would allow you to transfer a pre-defined amount on a specified date from one particular scheme to another. And this can be done by giving onetime instruction to the fund house.
In India, it is mostly the retired people who use SWPs, especially the fixed ones. Financial planners also say that corporates could also use SWPs, for example to pay advance tax and salaries to employees. Likewise professionals, corporates and others can use this to pay service tax. They say several other payment needs which are regular in nature could be met through SWPs. And each of these SWPs could be made tax efficient by taking care of the interval and the amount of funds to be withdrawn.
How to use SWP and when?
Suppose you have most of your funds in equity schemes. Financial planners and advisors say that in such a situation, the most effective way of going for the SWP route is to first shift part of the total corpus into a liquid fund, and the rest, which would be required after a year or more, into debt funds. In this way the tax incidence on your total portfolio would be much less.
Financial planners pointed out that during the accumulation phase in one’s life, the portfolio is usually heavily tilted in favour of equity-oriented schemes. Similarly, during the withdrawal phase, your portfolio should be tilted towards debt funds, and with a tax-efficient SWP in place.
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