Hi, my father in law has 50 lacs of fund in bank. Now he would like to fund in systematic widrawal mail (SWP) to get monthly returns from it. Please let me know how he can plan for SWP and who can help on this

Ans: Your father-in-law’s desire to invest Rs 50 lakhs in a Systematic Withdrawal Plan (SWP) is a thoughtful and prudent step to create regular income. An SWP allows investors to withdraw a fixed amount at regular intervals, providing the dual benefits of steady cash flow and capital appreciation. In this context, I will explain how your father-in-law can effectively structure this plan and what aspects need attention.

Let's break this down step by step for a better understanding.

Understanding the Basics of SWP
A Systematic Withdrawal Plan (SWP) allows you to withdraw a set amount of money periodically from your mutual fund investments. It’s a flexible way to create a consistent income stream while keeping the remaining amount invested in the fund.

Regular Income: This is ideal for those seeking monthly cash flow. He can choose the amount he wants to withdraw and how frequently.

Flexibility: SWPs allow changes in the withdrawal amount, frequency, or even stopping the plan when necessary.

Tax Efficiency: Since each withdrawal contains both capital gains and part of the original investment, SWPs may offer tax advantages compared to interest income from fixed deposits.

Steps to Plan an Effective SWP
1. Choose the Right Mutual Fund
When selecting funds for an SWP, your father-in-law needs to opt for funds that align with his risk tolerance, financial goals, and time horizon.

Balanced Approach: It’s important to select funds that offer a balance of growth and stability. Equity funds offer higher growth potential, while debt funds or hybrid funds can reduce volatility. For those seeking a balance between growth and safety, hybrid funds (a mix of equity and debt) could be an appropriate choice.

Avoid Over-Risk Exposure: While equity funds provide high returns over time, they can be volatile in the short term. If monthly income is crucial, a balanced or debt-heavy portfolio is often more suitable, reducing exposure to high-risk equity funds.

2. Decide on Withdrawal Amount and Frequency
Determining the right withdrawal amount is key to ensuring your father-in-law’s fund lasts for as long as he needs it.

Optimal Withdrawal: He must carefully calculate a monthly withdrawal amount that will meet his income needs but still leave enough money in the fund to grow. Withdrawing too much could erode the capital over time.

Safe Withdrawal Rate: A safe withdrawal rate (typically 4-5% annually) ensures the corpus is not exhausted quickly. If the fund generates good returns, the capital can remain intact while monthly income flows steadily.

Frequency: While SWP can be set up for monthly, quarterly, or yearly withdrawals, in your case, since your father-in-law needs regular income, the monthly option would be the most suitable.

3. Taxation Implications
SWPs come with a tax advantage compared to other traditional investment options, but it’s crucial to understand how these taxes work.

Equity Funds: For equity-oriented mutual funds, long-term capital gains (LTCG) above Rs 1.25 lakhs are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%. Hence, if the withdrawals are structured in such a way that gains fall under LTCG, the tax burden can be minimized.

Debt Funds: In the case of debt funds, LTCG and STCG are taxed based on the investor’s tax slab. Debt funds are generally more tax-efficient compared to fixed deposits, especially when held for the long term.

4. Monitor the Fund’s Performance
Once the SWP is set up, it is important to periodically review the performance of the mutual fund. Over time, market conditions change, and the fund’s performance can fluctuate. Regular monitoring ensures that your father-in-law can make adjustments to his withdrawal rate if needed.

Market Impact: If the market performs well, his corpus may grow even after regular withdrawals. In such cases, he can even consider increasing the withdrawal amount slightly.

Review Frequency: It’s advisable to review the SWP at least once a year to see if the fund is still performing in line with expectations.

Why SWP is Better Than Traditional Income Options
1. Flexibility in Withdrawals
Unlike fixed deposits, where the interest payout is predetermined, SWPs allow him to withdraw based on his financial requirements. He can decide how much he wants to withdraw monthly, and the remaining corpus stays invested, offering capital appreciation.

2. Tax Benefits
One of the primary advantages of SWPs over traditional fixed deposits is tax efficiency. In an SWP, the amount withdrawn consists of both capital gains and part of the invested capital. This makes it more tax-efficient than interest from bank fixed deposits, which is taxed according to the income tax slab.

3. Potential for Higher Returns
While traditional income sources like fixed deposits offer fixed returns, they may not always beat inflation. Mutual funds, particularly equity or hybrid funds, offer the potential for inflation-beating returns in the long run. This is critical for ensuring that your father-in-law's monthly withdrawals can maintain their purchasing power over time.

4. Capital Appreciation
SWP not only offers regular income but also keeps a portion of the fund invested. The remaining amount continues to grow, thus offering the possibility of capital appreciation even while generating monthly returns.

Possible Risks of SWP and How to Manage Them
While an SWP can be a very effective tool for generating regular income, there are some potential risks that need to be considered:

1. Market Volatility
Since SWPs are often linked to mutual funds, they are subject to market fluctuations. If markets perform poorly, the returns from equity or hybrid funds could reduce, impacting the overall value of the corpus.

Risk Management: To counter this, you can choose funds with lower volatility or increase the allocation to debt-oriented funds. Hybrid funds offer a good mix of equity and debt, balancing risk and return.
2. Exhausting the Corpus
If the withdrawal amount is too high, there is a risk that the corpus might deplete faster than expected. This is especially true if the market returns are not in favor during certain years.

Solution: It’s important to be cautious and avoid high withdrawal rates. Sticking to a 4-5% annual withdrawal rate, as mentioned earlier, will ensure that the corpus remains intact for a longer period.
3. Inflation Impact
Over time, inflation can erode the purchasing power of the withdrawn amounts. While SWPs offer capital appreciation, this needs to be monitored, and adjustments may need to be made to ensure the monthly withdrawal amount keeps pace with inflation.

Who Can Help Set Up the SWP
To ensure that the SWP is aligned with your father-in-law’s goals and risk profile, it's advisable to consult a Certified Financial Planner (CFP). They can help:

Analyse His Financial Needs: A CFP will evaluate your father-in-law’s monthly income requirements and other financial needs to design the right SWP.

Select the Right Funds: Based on his risk profile and time horizon, the CFP will suggest the most appropriate mutual funds for the SWP.

Monitor and Adjust: A CFP will also review the performance of the SWP regularly and make adjustments if necessary.

By consulting with a CFP, your father-in-law can be assured that his investments are being managed professionally, keeping his long-term financial goals in mind.

Final Insights
Customized Income Stream: An SWP is an ideal way for your father-in-law to generate regular monthly income while keeping his corpus invested for growth.

Tax Efficiency: Compared to traditional income sources like fixed deposits, an SWP offers better tax treatment, which can significantly increase the net returns over time.

Flexibility and Control: He has full control over the withdrawal amount and can adjust it as needed. However, regular reviews and monitoring are essential to ensure the plan remains on track.

Certified Financial Planner’s Role: To get the best out of the SWP, it’s important to seek the guidance of a Certified Financial Planner who can offer personalized advice and ensure that the SWP is tailored to his specific financial situation.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment