How To Smartly Use SWP In Mutual Funds

Divya Nair

07 Nov 2016

SWP or Systematic Withdrawal Plan is a facility offered by mutual funds to redeem units. The plan allows investors to exit their investments in small portions at regular intervals to meet their short-term goals or regular monthly income needs. These intervals can be monthly or quarterly.

Uses Of Systematic Withdrawal Plans (SWP’s) IN Mutual Funds

Usually, retired people use SWPs to create a regular flow of income from their investment corpus in mutual funds. But others can also use it for goals such as child’s education, to pay EMIs, to pay bills etc.

Salient Features Of SWP’s

  • Minimum Account Balance - In order to start the SWP facility, the minimum account balance should be Rs 25,000.

  • Time Intervals - The frequency generally available to withdraw are on monthly, quarterly or annual period basis.

  • Nature/Type Of Withdrawal Possible - Investors normally have two options to choose from fixed withdrawal wherein a certain amount of money can be withdrawn.

  • Appreciation Withdrawal - Wherein amount of appreciation only can be withdrawn.

Benefits Of SWP In Mutual Fund -

  • Rupee Cost-Averaging - SWP can be more beneficial if it is designed for a longer period as it let investors take the advantage of rupee cost averaging. Rupee cost averaging is an approach in which a person invest a fixed amount of money at regular intervals. This ensures that the investor buys more shares of an investment when prices are low and less when they are high.

  • Tax Advantage - When investors withdraw the money invested in mutual funds within a year, it attracts some amount of short-term capital gains. However when we withdraw the amount through SWP, it would not attract any tax. All the amount withdrawn in the first year would be the capital itself.

  • Good For Investors Looking For Fixed Income - SWP is good for investors who look for regular income for over a period of time.

How SWP Can Be Used Effectively -

  • Post-Retirement Income - SWP is one of the best ways to create a regular source of income post-retirement. Investments in debt funds, balanced funds etc can help gain more, apart from letting you withdraw at regular intervals.

  • Better Use Of Surplus Funds - If you have lump-sum surplus fund, a SWP allows you to invest that amount in mutual fund schemes and withdraw that amount in as per your requirement, hence enabling a disciplined way of managing your savings.

  • Best Substitute For Pension - Income from most of the pension plans is taxable, whereas if you invest in mutual funds and do a SWP, the amount you withdraw is tax-free. People can try creating a corpus 3-4 years before retirement and invest that later in an equity mutual fund to choose a SWP plan in order to save tax more efficiently.

  • Capital Protection - Risk-averse individuals can invest in arbitrage mutual funds as returns on these funds are risk-free. Under arbitrage funds, dividends are totally tax-free. Investors can reinvest the dividend received from their investments made in arbitrage funds and do a separate SIP, which can later be used to do regular SWP.

Conclusion - If you are ready to spend the money invested in mutual funds, SWP is a convenient way to get your cash without contacting the fund house every time you want to sell the units.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How To Smartly Use SWP In Mutual Funds

Divya Nair

07 Nov 2016

SWP or Systematic Withdrawal Plan is a facility offered by mutual funds to redeem units. The plan allows investors to exit their investments in small portions at regular intervals to meet their short-term goals or regular monthly income needs. These intervals can be monthly or quarterly.

Uses Of Systematic Withdrawal Plans (SWP’s) IN Mutual Funds

Usually, retired people use SWPs to create a regular flow of income from their investment corpus in mutual funds. But others can also use it for goals such as child’s education, to pay EMIs, to pay bills etc.

Salient Features Of SWP’s

  • Minimum Account Balance - In order to start the SWP facility, the minimum account balance should be Rs 25,000.

  • Time Intervals - The frequency generally available to withdraw are on monthly, quarterly or annual period basis.

  • Nature/Type Of Withdrawal Possible - Investors normally have two options to choose from fixed withdrawal wherein a certain amount of money can be withdrawn.

  • Appreciation Withdrawal - Wherein amount of appreciation only can be withdrawn.

Benefits Of SWP In Mutual Fund -

  • Rupee Cost-Averaging - SWP can be more beneficial if it is designed for a longer period as it let investors take the advantage of rupee cost averaging. Rupee cost averaging is an approach in which a person invest a fixed amount of money at regular intervals. This ensures that the investor buys more shares of an investment when prices are low and less when they are high.

  • Tax Advantage - When investors withdraw the money invested in mutual funds within a year, it attracts some amount of short-term capital gains. However when we withdraw the amount through SWP, it would not attract any tax. All the amount withdrawn in the first year would be the capital itself.

  • Good For Investors Looking For Fixed Income - SWP is good for investors who look for regular income for over a period of time.

How SWP Can Be Used Effectively -

  • Post-Retirement Income - SWP is one of the best ways to create a regular source of income post-retirement. Investments in debt funds, balanced funds etc can help gain more, apart from letting you withdraw at regular intervals.

  • Better Use Of Surplus Funds - If you have lump-sum surplus fund, a SWP allows you to invest that amount in mutual fund schemes and withdraw that amount in as per your requirement, hence enabling a disciplined way of managing your savings.

  • Best Substitute For Pension - Income from most of the pension plans is taxable, whereas if you invest in mutual funds and do a SWP, the amount you withdraw is tax-free. People can try creating a corpus 3-4 years before retirement and invest that later in an equity mutual fund to choose a SWP plan in order to save tax more efficiently.

  • Capital Protection - Risk-averse individuals can invest in arbitrage mutual funds as returns on these funds are risk-free. Under arbitrage funds, dividends are totally tax-free. Investors can reinvest the dividend received from their investments made in arbitrage funds and do a separate SIP, which can later be used to do regular SWP.

Conclusion - If you are ready to spend the money invested in mutual funds, SWP is a convenient way to get your cash without contacting the fund house every time you want to sell the units.

Have Referral Code?