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Ramalingam Kalirajan |7466 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Sep 26, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by sunil on Sep 26, 2024Hindi

i went to do swp

Ans: SWP, or Systematic Withdrawal Plan, allows you to withdraw a fixed amount of money from your mutual fund investment at regular intervals, typically monthly. It is the reverse of a SIP (Systematic Investment Plan), where instead of investing regularly, you withdraw regularly. SWP can provide a steady income while keeping your investment growing.

It’s an excellent option for generating regular income, especially for retirees, as it offers more flexibility and control compared to traditional investments.

Benefits of SWP
Regular Income: SWP gives you a fixed regular payout, which is helpful in meeting your monthly expenses.

Tax Efficiency: Compared to traditional fixed-income options like fixed deposits, SWP is more tax-efficient. Withdrawals are subject to capital gains tax, which is lower than income tax on FD interest.

Capital Preservation with Growth: Even as you withdraw regularly, the remaining portion of your investment continues to grow, potentially covering inflation and increasing your wealth over time.

Flexibility: You can choose the amount and frequency of your withdrawals—monthly, quarterly, or annually—depending on your needs.

Avoid Timing the Market: With SWP, you don’t need to worry about market ups and downs because your withdrawals happen at regular intervals, averaging out the price movements.

How to Set Up SWP?
Setting up an SWP is straightforward. Here’s a step-by-step guide to help you get started:

Select the Right Mutual Fund:

Choose a balanced or debt-oriented mutual fund that aligns with your risk tolerance.
If you prefer safety and steady returns, a debt mutual fund or hybrid fund might be suitable.
Decide on Withdrawal Amount:

Determine the fixed amount you want to withdraw monthly. Make sure it’s sustainable based on your initial investment and the expected returns.
A conservative withdrawal rate (e.g., 6%–7% annually) will ensure your principal isn’t depleted quickly.
Frequency of Withdrawals:

Choose how often you want the withdrawals—most common is monthly. You can also opt for quarterly or yearly based on your income needs.
Submit SWP Request:

Once you’ve chosen the fund and decided on the withdrawal amount and frequency, submit an SWP request with your mutual fund house or through your financial advisor.
You can also modify the withdrawal amount later if needed.
Ideal Fund Categories for SWP
Debt Mutual Funds:

These funds are low-risk and provide stable returns. They are ideal for those who want to avoid stock market volatility.
You can invest in short-term or liquid debt funds, which are less volatile.
Hybrid Mutual Funds:

These funds invest in both equity and debt, offering a balance between risk and reward. They can provide higher returns than pure debt funds but with slightly more risk.
These are ideal if you want to ensure both growth and safety.
Balanced Advantage Funds:

These funds dynamically manage the balance between equity and debt based on market conditions. They can offer capital appreciation with some protection against volatility.

SWP vs Other Income Options
Fixed Deposits vs SWP: SWP is more tax-efficient compared to fixed deposits, where the interest is fully taxed. SWP allows you to control the withdrawal and tax impact based on how long you hold the fund.

Pension Plans vs SWP: Pension plans may offer fixed income but lack flexibility. SWP gives you the freedom to decide both the amount and timing of your withdrawals.

Things to Keep in Mind
Market Risk: If you invest in equity funds, the market could fluctuate, affecting the value of your investment. To reduce risk, start with a mix of debt and hybrid funds.

Sustainability: Ensure your withdrawal amount is sustainable. Withdrawing too much too soon could deplete your capital.

Consult a Certified Financial Planner: It’s always a good idea to consult a CFP to design a plan that best suits your needs, considering both your financial goals and risk tolerance.

Finally
SWP is a great tool for creating a steady income stream, especially for retirees. By carefully choosing the right mutual fund and setting a reasonable withdrawal amount, you can enjoy a regular income while keeping your investment growing. With its tax efficiency and flexibility, SWP is a smart alternative to traditional savings plans, provided you manage it wisely.

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

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.