The pandemic has bought the world to its feet. Millions of people have lost their jobs, countless companies have shut down due to lack of business and market competition. During such times it is important to have emergency funds backed up in your financial decisions. A Systematic Withdrawal Plan allows you to have access to additional cash during such emergencies.
You might have heard of the SIP. In fact, you might already be investing in monthly investment plan to ease your retirement days. But in a situation like the current times of pandemic a Systematic Withdrawal or SWP might be what you need. It is meant to ensure that you have the funds in times of economic downturns such as Covid. What are its advantages and disadvantages? How can it act as a catalyst to additional funds? Is it for you? Read ahead to clear all doubts.
What is SWP?
SWP is redeeming money invested in any Mutual Fund Scheme in phases as compared to getting it in a lump-sum amount at the date of maturity. There are three benefits in doing so:
Capital appreciation by withdrawals in a timely manner
Avoid wrong market timings
SWP allows investors to generate both monthly revenue as well as an accumulated sum at the end of the maturity period
What are the Do’s and Don'ts of SWP?
SWP allows you to withdraw your money systematically making this a great addition in your investment plant to maintain a steady cash flow. However, alongside all its attractive benefits, you need to be aware about things to keep in mind or avoid as well. We have divided them into Yays and Nays.
SWP allows you to systematically withdraw a particular amount of money in a particular time from the total amount invested in a Mutual Fund scheme. Thorough planning leads to reaping maximum benefits in SWP.
Steady flow of income
Apart from your existing monthly income, SWP enables you to have access to extra funds in your bank account.
SWP allows them you withdraw a fixed amount every month from their invested amount without withdrawing the entire investment amount.
SWP is an efficient tool for tax benefits. Investors withdraw the money invested in mutual funds within a year, it attracts some amount of short-term capital gains. However, when you withdraw the amount through SWP, it does not attract any tax. Every withdrawal through an SWP is considered a combination of capital and income. Tax is payable only on the income component and not the capital component. All the amount withdrawn in the first year would be the capital itself.
The withdrawals from SWP to meet your monthly expenses helps you in withdrawing a large amount from the corpus during unforeseen circumstances.
Avoid SWP in Equity Funds
The rupee cost averaging works in reverse. More the sales during a decrease in market and lesser the sales during an increase in market. This leads to portfolio depletion.
Avoid SWP for short term
SWP is meant to give you timely returns throughout the course of maturity. Opting for SWP with short term opportunities limits your returns on investments
How does SWP guarantee returns for every stage of life?
SWP is a tool which can be beneficial through any walk of life. Be it if you are in your late 20s, 30s, 40s or even 50’s, SWP helps you gain additional income on a predetermined date, whether monthly, quarterly or annually. The ideal SWP fund is a balanced fund.
It is impossible to predict our lives. There could be instances which forces us to pay a lump-sum amount in one go, such as a Medical emergency or a pandemic. With a system like SWP in place, we can avoid that unnecessary worry of having funds during such times.
With the aim of securing your families health and happiness, SWP should be a must in your investment portfolio.
With SWP, you can customize the cash flow as per your requirement. You can choose to either withdraw just the capital gains on your investment or a fixed amount. Now that you are aware of what SWP is, along with its benefits, and how it works, it’s time to start getting returns from your invested funds on a regular basis through SWP.
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