As an investor who’s traversed the complex landscape of financial markets, I’ve found that the journey toward financial security demands strategic planning and the right tools. One such tool that has significantly impacted my investment approach is the Systematic Withdrawal Plan (SWP).
This unique feature, offered by mutual fund companies, has provided me with a steady income stream and instilled financial discipline and patience in my approach.
Here’s a first-hand account of the advantages and considerations of utilizing SWPs in my investment journey.
Advantages of Systematic Withdrawal Plans
Rupee-Cost Averaging:
The power of rupee-cost averaging has been a game-changer. With Systematic Withdrawal Plans, I’ve experienced the advantage of selling more units when the Net Asset Value (NAV) is low and fewer units when the NAV is high. This strategic selling has allowed me to navigate market volatility more effectively.
Steady Income Stream
Setting up a Systematic Withdrawal Plan has transformed my investment portfolio into a consistent source of income. I’ve appreciated the freedom to determine the withdrawal frequency and amount, ensuring that my financial obligations are met without compromising the overall investment.
Controlled Withdrawals
A notable advantage of Systematic Withdrawal Plans is that withdrawals are not subject to the whims of the NAV. Instead, they are executed as per the predetermined amount set by the investor. This level of control has provided me with a sense of security, especially during market uncertainties.
Financial Discipline and Patience
Before embracing Systematic Withdrawal Plans, I often made impulsive selling decisions during market downturns. However, with SWPs in place, I’ve learned to exercise financial discipline and patience. This shift in mindset has profoundly impacted my investment journey, enhancing its long-term effectiveness.
SWP – Considerations and Disadvantages
Suitability for Retirement Planning
While SWPs offer a plethora of benefits, they are particularly suitable for individuals approaching retirement. The focus on regular income aligns well with the needs of retirees who seek stability during their post-career phase.
Bearish Market Impact
It’s important to acknowledge that SWPs can erode the overall investment capital, particularly during bearish market conditions. Selling more units at a low NAV may reduce capital post-SWP cessation.
According to a financial expert at the KNAPS financial services, “Regular secondary income is one of the financial goals every individual should aim to achieve, specifically when they face job security issues or have non-pensionable jobs.”
He adds, “SWP (Systematic Withdrawal Plan) in Mutual Funds is one option that allows regular income as monthly withdrawals from the corpus one has built. If your corpus is invested in hybrid/equity funds, one gets the benefit of equity taxation under STCG of 15% for the 1st year and subsequent taxation under LTCG (10% tax after 1Lakh of exemption), and hence, it becomes a tax efficient income, specifically for someone who is taxable under higher income tax slabs.”
Maximizing Benefits Through Proper Planning
To harness the true potential of SWPs, thorough market research or speaking to a learned financial advisor is important. Before setting up a SWP, I took the time to evaluate how this strategy would align with my objectives. This ensured that I could maximize the benefits of SWPs, adapting them to my unique investment journey.
For instance, when I took a sabbatical from work to pursue higher studies for 6 months, I turned to the Systematic Withdrawal Plan (SWP) to manage my monthly expenses throughout my studies. Over six months, SWP seamlessly covered my monthly expenditures, allowing me to focus on my studies without the looming worry of financial constraints.
The beauty of SWP lay in its strategic structure – I opted to withdraw just 10% of my portfolio’s value, ensuring that my principal amount remained intact. This approach not only ensured my daily expenses were met but also set the stage for a solid financial revival post-sabbatical, as I had the satisfaction of recuperating the withdrawn amount once the SWP concluded. My tuition fee, however, was taken care of by my savings.