Let us look at an example to understand the workings of SWP a little better. You park Rs 1 lakh in a liquid fund and set up an SWP to withdraw Rs 10,000 every month. As you can see, this is a convenient way to take money from your investments at periodic intervals. This becomes extremely useful if you are a retired person looking to supplement your primary income.
SWPs have become popular lately because taxation dividends and irregular dividend payments by mutual funds. Many retired investors used to rely on dividends from mutual funds for their needs in their retired lives. However, the government has taken away the advantage of this route by taxing dividends. Also, mutual funds stop declaring dividends once the market gets into a bad phase.
As per Sebi norms, mutual funds can declare dividends only out of realised profits. Because of this provision they will not be able to declare dividends during a downturn in the market. Many mutual fund investors found out that instead of relying on dividends, SWPs are convenient way to withdraw money regularly.
Many investors have started setting up SWPs in aggressive hybrid schemes because they thought these schemes were less volatile than pure equity schemes. However, most of these investors found out during the recent downturn that their corpus has shrunk drastically after regular withdrawal plus the adverse conditions in the market. Be careful about this aspect while setting up an SWP.
Also, you should be careful about how much you are going to withdraw from your investment every month. If you do not want to touch your capital, you should try to withdraw less than the returns made by the scheme. For example, if you are expecting 7% returns from the scheme, you should withdraw only 5% or 6% from the scheme. This will help you to preserve the capital. However, if you do not mind consuming the entire money, you can chose an amount or period of your choice.
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1 Comment on this Story
Haresh53 days ago
As SIPs are goal linked SWPs shld also be goal linked and vice versa