SWP or Systematic Withdrawal Plan is a financial investment strategy that allows you to withdraw a fixed amount of money from your investment portfolio at regular intervals. This helps you to ensure a consistent cash flow while also maintaining the potential for investment growth. Read on to know more about SWP in detail.
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SWP full form is Systematic Withdrawal Plan. SWP is a facility offered by Unit Linked Insurance Plan (ULIP) and mutual funds where you can withdraw a fixed amount of money at regular intervals (monthly/ quarterly/ annually) from your market-linked investment funds.
This investment strategy help individuals to generate regular income without disturbing their principal investment. This makes it an ideal option for retirees or those seeking a consistent cash flow.
When setting up an SWP, you can determine the following terms:
Amount you wish to withdraw
Frequency of withdrawals
The remaining funds in your investment portfolio continue to be invested according to your chosen investment plan strategy. In order to invest in a right option, SWP calculator helps compute your matured amount as per your monthly withdrawals.
The key features of a Systematic Withdrawal Plans are as follows:
Regular Income: SWP plan allows you to receive a predetermined amount of money at regular intervals. This feature provides a reliable income stream.
Flexibility: Plan offers the flexibility to choose the withdrawal frequency and the amount to be withdrawn as per your needs.
Investment Continuity: With an SWP, the remaining funds in the investment portfolio continue to be invested. You still have the potential to benefit from market returns and the growth of their investments
Diversification: SWP enables you to diversify your income sources. This allows you to spread your risk and potentially enhance your overall portfolio performance
Let us learn the working process of an SWP plan from the list mentioned below:
Step 1: Set an Investment Portfolio
Your portfolio may include various financial instruments like,
Exchange-Traded Funds (ETFs)
The portfolio is designed to generate potential returns over time.
Disclaimer: “Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.”*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Step 2: Withdrawal Parameters
You can determine the following withdrawal parameters for the SWP:
Withdrawal frequency (monthly/ quarterly/ annually)
Withdrawal amount for each interval
Step 3: Calculation of Withdrawal Amount
Based on your chosen withdrawal amount and frequency, the SWP provider calculates the total amount to be withdrawn from the investment portfolio for each withdrawal interval.
The amount is fixed as per the following factors:
Percentage of Portfolio Value
You can use an SWP calculator to calculate your withdrawal amount and maturity returns.
Step 3: Execution of Withdrawals
The SWP provider initiates the withdrawal from the investment portfolio at each predetermined interval and transfers the specified amount to the investor's designated account.
Step 4: Investment Continuity
The remaining funds in the investment portfolio continue to be invested according to the investor's chosen investment strategy.
Step 5: Monitoring and Adjustments
You can monitor the SWP and the performance of the investment portfolio. Adjust the withdrawal amount, frequency, or investment strategy to align with changing financial goals, market conditions, or personal circumstances.
There are several benefits of buying a SWP as part of your investment strategy, which are as follows:
Cash Flow Management: Efficient cash flow management as you can plan and budget your expenses effectively. This ensures that you have the necessary funds available without liquidating your entire investment.
Market Timing: Instead of trying to predict market movements and selling investments all at once, SWP allows you to systematically sell a portion of your investment holdings at regular intervals. This approach can help smooth out the impact of market volatility and poor investment decisions.
Disciplined Approach: SWP encourages a disciplined investment approach as you commit to a predetermined withdrawal schedule. This helps you to stay focused on your long-term investment goals and avoid impulsive decisions.
Good option for Retirees: SWP is an ideal option for your retirement as it helps in redeeming regular cash flow from your existing or current investments.
Reinvestment Potential: SWP allows the opportunity to reinvest excess funds in other investment options. This will enable you to potentially benefit from market growth by consistently reinvesting your surplus funds, maximizing the overall return potential.
Tax Benefits: TDS is not deducted on SWP withdrawals, unlike on SIP Investment. But, capital gains will be taxed as per the withdrawal amount and type of scheme.
Here are capital gains tax for various mutual funds:
|Types||Equity Mutual Funds||Balanced Mutual Funds||Debt Mutual Funds|
|Capital gain tax – Short term||15%||15%||According to tax slab|
|Capital gain tax – Long term||10% without indexation||10% without indexation||20% after indexation|
**SWP calculator can be used to estimate how much investor can withdraw from his/her lump sum investments.
Here are some of the risks associated with SWPs:
Market volatility: The value of the units in the mutual fund can go down, which could lead to a reduction in the amount of withdrawn money.
Withdrawal charges: Some mutual funds charge withdrawal charges, which can reduce the amount of money available for withdrawal.
Inflation Risk: f the withdrawal amount remains fixed over time, the purchasing power of the income stream may diminish as inflation erodes the value of money. It is essential to consider adjusting the withdrawal amount periodically to keep pace with inflation.
Liquidity Risk: Once funds are invested in an SWP, they may not be readily available for unexpected expenses or emergencies.
Tax Implications: Withdrawals made through SWP may have tax consequences.
A Systematic Withdrawal Plan (SWP) offers several benefits, including regular income, cash flow management, and a disciplined approach to investing. However, it also comes with risks like market volatility, inflation, longevity, liquidity, tax implications, and dependence on investment performance. Therefore, it is crucial to understand the risks involved before making a decision.
SWP can be suitable for individuals who require a steady stream of income during their retirement years or for meeting specific financial obligations
SWP can provide a sense of stability and mitigate the impact of market volatility, as it allows for consistent withdrawals irrespective of market conditions
The portfolio should be appropriately diversified to manage risk and generate consistent returns
SWP can have tax implications depending on the type of investments held and the specific tax regulations in your jurisdiction
Choose a mutual fund that align with your investment objectives, risk tolerance, and financial goals
Complete the necessary documentation, including the application form, Know Your Customer (KYC) documents
Determine the SWP parameters on the amount you wish to withdraw and the frequency of withdrawals
Submit the SWP request specifying the withdrawal amount, frequency, and other relevant details
Monitor your SWP withdrawals and regularly review your investment performance and financial goals
You choose a mutual fund that you want to invest in
You decide how much money you want to withdraw each month
The mutual fund will sell a certain number of units from your investment each month to generate the desired amount of money
The money will be deposited into your bank account
*All savings are provided by the insurer as per the IRDAI approved
insurance plan. Standard T&C Apply
Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^10(10D) Tax benefit are for Investments made up to Rs.2.5 L/ yr and are subject to change as per tax laws.
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