Types and Benefits of SWPs

Financial planning is an important component of modern life. Investors are constantly looking for efficient investments to maximize their benefits. Additionally, rising inflation requires individuals to find other sources of income. Traditional options like real estate and fixed deposits are expensive and no longer attractive. To overcome these drawbacks, SWPs in mutual funds can be an excellent option.

Modern investors look for new efficient strategies that deliver higher returns on their investments. Moreover, they need to find additional income sources to ensure they can meet their expenses in an inflation-driven economy. Rental income requires a huge investible surplus and has several other expenses, such as maintenance, property taxes, and others. Another option is fixed deposits, which offer assured returns but are not adequate to beat inflation.

These limitations can be overcome with mutual fund investments and investors can generate additional income via systematic withdrawal plans (SWPs).

Understanding SWPs

Most individuals are aware of systematic investment plans (SIPs) wherein a fixed amount is invested at regular intervals. A lesser-known option is SWP where investors periodically withdraw a predetermined amount from their mutual fund investment. The balance investment continues to generate returns and benefit from capital appreciation.

Types of SWPs

Individuals may either opt for withdrawing a fixed amount or capital appreciation.
🔹 Fixed SWP: The investor sets up the SWP for a fixed amount on a particular date. All parameters like the SWP amount and date are predetermined and cannot be modified until canceled or the entire principal is withdrawn.
🔹 Capital appreciation SWP: In this option, the investor withdraws only the profit made on their capital investment. The amount varies from one withdrawal to another and it is also possible there may be no profits to be withdrawn on a particular instalment date.

Benefits of SWPs

All types of investors can benefit from SWPs, which is a convenient and efficient way to meet their financial goals. Here is why:

🔸 Additional income

Any individual who is looking for supplemental income over and above their salary or business earnings will benefit from an efficient SWP. By initiating an SWP, they can enjoy additional income at regular intervals to meet their financial goals and expenses, such as household spending, school fees, and others.

🔸 Disciplined withdrawals

SWPs ensure individuals adhere to financial discipline while managing their investments. Irrespective of market conditions or emotional sentiments, SWP liquidates proportionate units based on the predetermined withdrawal amount to cover their financial goals and meet their expenses. SWPs provide protection against impulsive decisions based on emotions or market volatility.

🔸 Retirement planning

SWPs can be beneficial for senior citizens post-retirement to avail of regular income especially if they do not have any pension or other sources of income. Regular withdrawals provide consistent and reliable income to efficiently manage their regular expenses and other financial requirements.

🔸 Rupee cost averaging

When an investor opts for a SWP, a certain number of units are redeemed to withdraw the specified amount at periodic intervals. Therefore, in bullish markets lesser number of units are redeemed and during bearish conditions more units are redeemed. This averages the returns over a period and safeguards investors from possible losses due to sentimental decisions.

An SWP serves as an efficient source of additional income. New and seasoned investors can both benefit from including mutual fund SWP in their portfolios. However, implementing the SWP considering individual needs is crucial. An experienced advisor like SRH Wealth Management guides investors through the entire process to generate passive income without assuming unnecessary risks to achieve long-term financial stability.