Growing Money while Withdrawing: The Systematic Way

With increasing age, it is sensible to look towards avenues that provide a constant source of income and don’t test one’s risk appetite to the fullest, pension schemes and FDs, for instance.

What if we tell you that contrary to popular belief, mutual funds do provide options to tackle the problems mentioned earlier? This blog is all about shattering those misconceptions and spreading some information.

What is SWP?

SWP stands for Systematic Withdrawal Plan. As the name suggests, this must relate to something of a periodic fashion similar to SIP. Well, it can be thought to be the exact opposite of SIP.

As SIP is analogous to wise investing, SWP is to smart withdrawal. SWP allows investors to withdraw a fixed amount from the invested corpus periodically. This provides the dual benefit of regular income and staying invested in the market.

How does SWP Work?

The above table demonstrates a hypothetical situation taking into account various market fluctuations and the effect on the remaining units. One thing that must be remembered is that market fluctuations do not affect the number of units.

• Initially, a corpus of ₹ 1,00,000 is considered to have a NAV of ₹10, resulting in 10000 units.
• Now, an SWP of ₹5000 is started.
• In the first month, the market shows positive growth and the number of units corresponding to the NAV are redeemed.
• The NAV fluctuates according to the market, and so do the number of units.
• Even after all the fluctuations and withdrawal worth ₹20000, it is observed that the corpus grows to ₹120473.4848.

This simple example demonstrates that an investor can earn money even after periodic withdrawals through this mode.

Things to be kept in mind before Opting for SWP

• Exit Load

The exit load and lock-in period must be considered while opting for SWP as partial withdrawals too may attract exit loads in some funds.

• STCG Taxes

The SWP is often recommended to be started after one year in equity funds and after three years in debt funds. This is so because any withdrawal before these periods is taxable under Short Term Capital Gains (STCG), i.e. flat 15% on equity funds and according to the income slab on debt funds.

What is STP?

STP stands for Systematic Transfer Plan. This mode too redeems units from an investment scheme. Still, instead of transferring the amount to the investor’s account, the money is reinvested into another fund, generally from the same house. This may have opted when an investor has a huge corpus and intends to move towards a lower risk investment strategy while remaining invested in the equity. Also, investors with a low-risk appetite might initially invest lumpsum in a low to moderate risk fund but then gradually transfer to a more aggressive fund.

How does STP Work?

The above table demonstrates a hypothetical situation taking into account various market fluctuations and the effect on the remaining units. One thing that must be remembered is that market fluctuations do not affect the number of units.

• Initially, a corpus of ₹1,00,000 is considered in a debt fund assumed to give a return of 8% per annum.
• Now, an STP worth ₹20,000 is started and transferred to an equity fund assumed to give a return of 20% in the first year, a downfall of 10% in the second and a return of 15% in the third year.
• At the end of the third year, it was observed that a net gain of 34.46% was generated through this mode.

Though the estimations don’t quite reflect how the markets work, one can get a rough idea of how does the STP take benefits of both worlds, i.e., debt and equity.

Things to be kept in mind before Opting for STP

• Exit loads

must be considered starting an STP. An STP must be started only upon completion of the lock-in period to avoid paying extra charges.

• Taxes

The returns on redeemed units are taxed, similar to ordinary debt and equity funds.

That was some talk about money matters and shattering some misconceptions related to mutual funds. So, look into these withdrawal modes before breaking the piggy bank called a mutual fund. We’ll be back with another blog. Till then, Stay Safe! Invest Safer!

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