Systematic withdrawal plans allow investors to earn regular income through mutual fund investments. Anyone who has lump sum cash and wants to use the money to pay regular expenses, but not run out, should consider SWPs. SWPs allow you to earn returns while also helping to fund your expenses.
Here’s a quick explanation of Systematic Withdrawal Plans in Mutual Funds. SWP allows investors the ability to withdraw a set amount of their invested capital at regular intervals. By allowing investors to withdraw a portion of their mutual fund investments, SWPs make it easy for them to manage regular expenses. Let’s look at how to put money into mutual funds via SWP. You can choose from any mutual funds you want to invest. Also, you can specify how much you would like to withdraw each month. A SWP can be created by specifying a withdrawal amount in accordance with your expected returns. You might expect the scheme will return 14% annually. You then create the SWP so that you can withdraw 1% of your invested monthly amount. Your annual withdrawal amount will equal 12% of your invested amount, while your expected return on investment is 14%. Your principal will not be affected by your withdrawals and your monthly withdrawals can easily be funded with the returns you earn from your investment. You can withdraw regularly for a long time.
It sounds complicated, so why would you want to go for a SWP? It’s not as difficult as it seems. Let’s say you just retired and have a large retirement fund of INR 60 lakhs. You also have other assets. You could earn between 7% and 8% annually if you put 50 lakhs into a FD. The tax rate on this return will be determined by your tax bracket. If you fall within the 30% tax bracket, your post-tax return will be between 4.9% and 5.6%. This is because inflation, which has historically averaged 5%, will affect the return.
You are probably asking how to make money through mutual funds, or SWP. Imagine that you have 50 lakhs to invest in a hybrid fund with some exposure to equity but also some debt exposure. You invest in the scheme for one year, then you create a SWP so that you can withdraw no more than 8%. You would have a monthly SWP equivalent to approximately. Your monthly SWP would be approximately 33,000 INR. This would mean that your annual withdrawal would be less than 8% of the investment. Your 50lakhs fund continues to grow, while your withdrawals are funded from the return it earns. This is how you can increase your money while also funding expenses for as long you like.
You might be curious about what happens to your SWP if the market falls or your returns fall below your expectations. You can decrease your withdrawal amount and increase it later. You can also increase your SWP balance at any time. SWPs are a flexible way for mutual funds investors to make investments.
Anyone who needs regular income to pay expenses and has the money to invest in SWP mutual funds should look into SWP. You might think that only retirees or those with large assets should invest in SWP. You can still invest in SWP even if your corpus is only 5lakhs. You should learn how you can choose the best mutual funds for your needs and determine the withdrawal amount that is appropriate to your return expectations. A bonus could come from a salaried worker or an owner of a business with some cash in their bank. You will likely have household expenses that you need to pay. A SWP can help you finance at least some of these expenses.