What are Systematic Withdrawal Plans (SWPs)? How do they work to provide steady income flow?

SWP or the systematic withdrawal plan is widely used in mutual funds to set up a withdrawal of a specific amount or portion of capital at regular intervals. It facilitates regular cash flows along with capital appreciation.

“SWPs provide the flexibility to choose the amount and frequency with which you can withdraw investments regularly. Besides, you can choose to just withdraw gains from the portfolio and keep their capital invested. Depending on the amount chosen, units will be sold from a portfolio and the funds transferred to your account,” notes Kavitha Subramanian, Co-founder, Upstox.

Who should opt for SWPs?

•  Individuals who have accumulated a corpus & require future cash inflows. For instance, retired individuals, parents who want to save for their children’s education etc.

•  Individuals who do not have steady income source eg: professionals etc.

Factors to consider when doing SWP

Shweta Rajani, Head - Mutual Funds, Anand Rathi Wealth lists out the factors one should consider when opting SWP:

•  Understand the breakup of the corpus that you have and create a long term and a short term basket.

•  Each of these baskets will have a different asset mix depending on the tenure.

•  Park two-year expenses in the short term basket, and have an SWP out of this part. This basket will have 100% assets in debt.

•  Rest of the assets can be parked in equity & debt with the proportionate of 60 to 70% in equity and 30 to 40% in debt for the long term.

•  These two baskets need to be maintained consistently year-on-year.

Illustration:

A retired individual of 60 with a corpus of Rs 1 crore  and requires Rs. 50,000 monthly cash flow to meet his monetary obligations.

A suitable investment strategy is as follows:

In this scenario, this individual can conduct an SWP in the portfolio from his short term basket.

A year later, he will have to review his portfolio and make changes to his portfolio and add another year’s expense to this one month basket. This suggests how SWP with the right asset allocation strategy can help one grow his portfolio and have a regular flow of income. For the debt portion, the expert suggests opting arbitrage funds, which offers debt like return and equity like taxation.