What does SWP mean in the context of finance?
The word SWP is an abbreviation for a systematic withdrawal plan. It is a system of investment in a Mutual Fund Plan. This system of investment offers withdrawal of some fixed amount after a particular period as at the gap of one month, three months, or once a year from the date of investment anyone has done in any of the mutual fund plans. This plan is a good choice for people wanting a constant flow of banknotes against their contribution instead of fixed deposits or postal deposits with declining interest rates.
It is up to the investor to fix a time of the month, quarter, or year to take out the amount and deposit it in the investor’s bank account by the asset management company or AMC.
Main Features.
After gaining insight into what is SWP now let us focus on its working module— how it initiates income.
This method makes cash flow by trading units from the plan at a set downtime span. The figure traded in is determined by the amount invested in SWP and the net asset value or NAV of the plan on the date of withdrawal.
Let us have an example to make it comprehend more easily—
Suppose an investor invests 10,000 thousand in a mutual fund plan. And the buying NAV is INR 20, consequently, 5000 units are allocated. The reason is that the investor began with a monthly SWP of INR 600 post one year from the date of investing to keep away from exit load.
In the initial first month of SWP, I think that the NAV of the plan was INR 22. So in regards to initiating INR 600, the trading unit used by AMC will be 27. 272 units (INR 600/ 22). After this trading, the left out unit will be 4, 972.7(5000 – 27.272). The following month suppose the NAV was 22.50 the AMC traded 26.6666 units (INR 600/22.50 NAV). Then the unit balance comes down to 4,946.0(4,972.7 – 26.666). In the third month suppose the NAV was 23.00, and the trading done by AMC was 26.086 units( INR 600/23 NAV) so now the unit balance comes down to 4919.9. Likewise, this procedure goes on each month till the culmination of the SWP plan period decided by the investor.
As observed in the example, the unit balance comes down gradually in the SWP scheme. Nevertheless, if the plan NAV mounts up at a percentage above the withdrawal rate, the value of the investment goes higher too. Nonetheless, if the plan NAV comes down instead of going up, then there will be an opposite effect on the investment. The reason is that in the case of falling NAV, more units are being traded, hence less growth.
Advantages.
1. Agility or flexibility— in this scheme the investor has the agility to select the amount, period, and date as per his/ her choice. Apart from this the investor can also halt the plan at any phase or can further invest or can take out an amount in addition to the allotted SWP withdrawals.
2. Steady revenue— this plan facilitates steady revenue to investors by enabling a constant source of income from their investment. Hence this plan is very suitable and practical for those needing constant cash flow for bearing their everyday expenses.
3. Increased capital— in case the SWP withdrawal rate is less than the fund return than in this case the client gets the advantage of the increase in the capital also in the long run.
4. No tax deduction source(TDS)— the SWP investment does not involve TDS for resident individual clients.
What distinguishes SIP from SWP?
SWP allows you to normally put a large amount in mutual funds, and take out a specific amount at the prefixed time. As you keep taking out the invested amount the fund decreases but the surplus amount from the large fund remains endowed.
SWP or systematic withdrawal plan functions conversely to that of SIP. In the SWP method, the investors are authorized to redeem a set amount from mutual fund plans. But in contrast in the SIP format, the investor invests a fixed amount in the chosen mutual fund plans at fixed intervals.
In SIP, rather than investing a big amount at one time, investment can be done in small amounts at a specified time.SIP helps in wealth build whereas SWP is a steady source of cash flow. SIP is beneficial for investors of all age groups, especially the younger generation. Whereas SWP is generally preferred by retirees and senior citizens.
In the SIP format, the money automatically gets deducted from investors’ bank accounts to purchase mutual fund units. But in SWP, the invested units are redeemed by the mutual fund company to credit the cash in the investor’s bank account.
Average rupee cost in SWP.
Rupee cost averaging involves investing the amount at regular gaps, disregarding per-unit unit cost. And by investing at regular intervals, the investor gets the advantage of investing covering the up and down market.
The main characteristic of rupee cost averaging is commitment. If an investor is tolerant and can be stable in the time of economic downfall then his chances of gaining capital increase will be enormous.
Rupee cost averaging is good for investors who do not have time to keep an eye on the economic scene. One can invest a particular amount at fixed intervals whatever the price of the unit.
Uses
1. People searching for a constant source of additional income— the SWP scheme is well for such people. This plan can help sustain the ascending cost of living. So, investing for long terms in mutual funds and withdrawing at regular intervals via SWP can be a smooth way for creating a constant source of additional income.
2. Those wondering about capital safekeeping— risk-avoiding investors can put money into moderate or low-risk mutual fund plans and get only the capital increase benefit as SWP.
3. People wanting to create their pension— SWP is a great way to make a pension plan for people without any pension backup by investing in schemes matching their risk profile and getting a regular income at an interval preferred by them.
4. People who fall in the high tax group—- as there is no TDS on the capital gains of SWP, it is very useful for people who are in the high tax category.
To sum up, a systematic withdrawal plan or SWP is an effective and useful gadget to have. Irrespective of the fact that whether you are a new or an adept investor, the SWP can be utilized in a way to get your financial goal. The best part is that the gains are tax efficient and there is no TDS too like other conventional options.
