Mutual Funds: How to effectively use a systematic withdrawal plan? A step-by-step guide

Everyone has different needs for their money. Because of this, everyone invests their money in their own way. Some people like to put a big chunk of money in all at once, while others like to put in smaller amounts over time. Some people want their money to grow bigger, while others want to get some money back regularly. To help everyone meet their goals, fund houses offer different tools.

One of these tools is called a Systematic Withdrawal Plan (SWP), which is a method of withdrawing a fixed amount from your mutual fund investment at regular intervals, providing a steady income stream. Here’s a guide on how to effectively use an SWP:

How does SWP work?

Let's break down a systematic withdrawal plan in simpler terms, step by step:

1. Pick a mutual fund - First, you choose a mutual fund to invest in. This is like choosing a savings jar where you want to put your money.
2. Open an account - You need to open an account with the mutual fund company, similar to opening a bank account.
3. Decide how to invest - You decide whether you want to put money into this fund all at once (lump sum) or bit by bit over time (SIP).
4. Set up SWP - You then tell the mutual fund company that you want to withdraw a fixed amount of money regularly (monthly, quarterly, etc.). This is like setting up a plan to take out a certain amount from your savings jar at regular times.
5. Withdraw money - When the date you picked for withdrawal arrives, the mutual fund company takes out the amount you wanted. They do this by selling a part of your mutual fund, which means they convert some of your investments into cash.
6. Money to bank account - The money from the sale is then transferred to your bank account, just like someone putting cash from the savings jar into your wallet.
7. Continue the process - This process keeps happening at the intervals you chose (every month, every three months, etc.) until you stop it or your investment runs out.
8. Earning returns - Meanwhile, the money that remains in the mutual fund continues to grow (or shrink) based on how well the investments are doing. Over time, as you keep taking money out, the total amount left in your fund decreases.

What are the benefits of SWP?

Regular income - An SWP gives you a steady stream of money, just like getting a regular paycheck. This is helpful for managing your monthly expenses.

Flexibility - You can choose how much money you want to withdraw and how often (monthly, quarterly, etc.). You can also change the amount or stop the withdrawals whenever you want.

Tax benefits - The money you withdraw from your mutual fund might be taxed less than other types of income, depending on your country's tax rules. This can help you save money on taxes.

No lock-in period - Unlike some investments, you can start and stop an SWP anytime. There are no penalties for withdrawing your money.

Capital gains - Even though you are withdrawing money, the remaining amount in your mutual fund can continue to grow. This means your investment can still earn returns over time.

Rupee cost averaging - With an SWP, you withdraw money in small amounts regularly. This can help reduce the impact of market ups and downs on your investment.

Peace of mind - Knowing you have a regular income can reduce financial stress and give you peace of mind, especially during retirement.

Customization - You can tailor the SWP to fit your needs. Whether you need more money at a particular time of the year or want to adjust for inflation, you can customise the plan.

In conclusion, SWP is a versatile and effective financial tool that provides regular income from your mutual fund investments. Whether you need steady cash flow for retirement, supplemental income, educational expenses, or medical costs, an SWP can be tailored to meet your needs. It offers flexibility, potential tax benefits, and the ability to continue earning returns on your remaining investments.

By carefully setting up and managing an SWP, you can enjoy financial stability and peace of mind, making it an excellent choice for individuals seeking reliable and manageable income solutions.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited