Systematic Withdrawal Plan (SWP) is the withdrawal of fixed amount of money from an investment on a periodic basis. Well, as per the fundamentals, mutual fund investments should be withdrawn over period of time; and never on a lump sum basis.
This helps to take advantage of the sales price averaging. It works on the same principle as Cost Averaging. Average sales price will work out to be higher if withdrawn in a periodic manner than in one-time withdrawal.
Systematic Withdrawal Plan Options
There are 2 types of Options available in Systematic Withdrawal Plan –
1) Fixed Withdrawal
In this case, a fixed amount of money is withdrawn every month by redeeming the required number of units, which is based on the NAV of the mutual Fund at the time of withdrawal.
Example: 1000 units are present in the mutual fund and the NAV in the current month is 10. The withdrawal amount requested is Rs. 900. Hence, 90 mutual fund units will be redeemed to fund the withdrawal.
2) Capital Appreciation
Here, a certain percentage of the capital appreciation is withdrawn on periodic basis. If the fund appreciation does not match the requested withdrawal amount, then payment in that period will be withheld and pay-out will be made in the subsequent period. Generally, growth funds are preferred for this option.
Example: For a quarterly Systematic Withdrawal Plan, the withdrawal requested is Rs. 500. If the capital appreciation has been Rs. 600 and 90% of capital appreciation is permitted, then Rs. 540 will be deposited in the investor’s bank account at the end of Q1.However, due to the downturn in markets, if the capital appreciation in Q1 is only Rs. 450. Thus, the payment will be withheld and paid in Q2 along with payout for Q2 i.e. Rs. 450 + Rs. 540= Rs. 990.
Key Benefits of Systematic Withdrawal Plan
- Money when you need it
Systematic Withdrawal Plan allows account holder to access their money exactly when they need it. This helps individuals to achieve their financial goals.
- Regular Income
It allows investor to withdraw money on a periodic basis. Thus, investors do not need to withdraw everything at once. This way, Systematic Withdrawal Plan helps achieve a higher average sales price. Also, timing the market is not necessary to ensure that best sale price is available.
- Tax Advantage
Systematic Withdrawal Plan offers tax advantage as long term capital gains have a lower tax rate. Tax Deducted At Source or TDS is not applicable.
Systematic Withdrawal Plan can be set up to withdraw only the capital appreciation amount. In this way, one can enjoy the gains while the capital still stays invested.
How does Systematic Withdrawal Plan work?
Nothing can be more blissful than receiving regular income to fund the day to day expenses during retirement or funding your child’s tuition fees or any other requirement. What better way to have this than start a SWP.
Let’s take a look at the following example to see on how to apply Systematic Withdrawal Plan –
Janak has 10000 units of a mutual fund X. He has availed of Systematic Withdrawal Plan option and has instructed the fund house to withdraw Rs. 5000 on the 4th of every month. In this case, fixed withdrawals are made from the capital. Following table explains how this will work-
|Month and Date||No of Units Available||NAV on 4th||Units Redeemed||SWP Amount (Rs)||Units Remaining|
In the above table, we can see that the initial number of MF units is 10000. On Jan 4th, the NAV is 15. Thus, units redeemed to withdraw Rs. 2000 is 2000/15= 133.33. This leaves us with 9866.67 units in month of Jan. Similarly, we can see how the units are redeemed in the following months.
Initial years of an individual’s life are spent saving and investing those savings in various financial instruments like Mutual Funds, PPF, etc. It is important that these savings are available to us in times when we need really need them.
If these are available to us in a periodic manner, then that can help in planning us in meeting more regular expenses like tuition fees for children, daily expenses in retirement, payment of premium for insurance policies or any other financial purpose you can think of. SWP can help achieve all this.
It’s a matter of opening your mind and seeing where Systematic Withdrawal Plan can be really helpful to us.
Systematic Transfer Plan or STP refers to an investment plan wherein fixed amount of money can be transferred from one mutual fund to another on a specified date.
This transfer can be made on a weekly, monthly or quarterly basis. Systematic Transfer Plan is generally used to reduce exposure to equities or increase exposure to equities depending on the market conditions; but over a period of time.
This works just like the (Systematic Investment Plan) SIP except that; here money is being transferred from one mutual fund to another, rather than from a bank account. The mutual fund will reduce the number of units equal to the amount you have specified for transfer.
For e.g. If `1000 needs to be transferred from fund A to B, then units of fund A worth `1000 will be sold and transferred to fund B.
Benefits of Systematic Transfer Plan
Let’s look at the benefits of Systematic Transfer Plan –
1) Like a SIP
You can invest a lump sum amount in one mutual fund and have a fixed amount of money transferred to another mutual fund on a periodic basis, just like an SIP would.
2) Like Systematic Withdrawal Plan
When you feel that markets are risky and might go down, you can have money transferred from an Equity fund to a Debt Fund. This will help reduce your exposure on equities.
3) Provides Good liquidity
This is the benefit you get by investing in any mutual fund. Since your money is invested in a debt fund, you can sell the units anytime in case of an emergency or otherwise, and you can have liquid cash in your account in no time.
4) Capital Appreciation
You will benefit from the rise in NAV of the Debt fund or Equity fund that you are invested in.
In most funds, fund units are sold so that specified amount can be transferred to another fund. Some STPs provide options wherein only the capital appreciation can be transferred.
So, does Systematic Transfer Plan sound like a new generation financial instrument? Well, here’s how you can make most of it. Let’s look at some scenarios below to see how Systematic Transfer Plan can be beneficial for us.
Scenario 1- Debt to Equity
Now what do I mean by saying Debt to Equity. Money is invested in a debt fund and then transferred to an equity mutual fund on a periodic basis. This is useful when a large sum of money needs to invested in stock markets and timing the market might not be a good option due to volatility in the market.
Let’s take a look at the following example. Nisha has recently inherited `10 lakhs from her father. She has a keen interest in putting this money in stock markets but is apprehensive that she might lose all of it, as the market has been very volatile. Here’s how Systematic Transfer Plan helps her-
1) She invests `10 lakhs in XYZ Debt fund.
2) She can invest the entire amount in a liquid fund or a short term bond fund as this will give her stable returns. Also, the NAV of Debt funds or Liquid fund do not fluctuate much, assuring that the value of her investment will not drastically decrease in response to market movement.
3) She then opts for the STP wherein, every month or whatever interval she prefers, a pre-determined amount of money can be transferred to an Equity Diversified fund.
4) In volatile Stock markets, this helps reduce her risk of timing the markets to ensure that she gets a good purchase price.
Scenario 2- Equity to Debt
This strategy is useful when you want to cash out when you retire.
Look at Shirish’s example, who is now retired and wants to cash out the money he has invested in an Equity fund and reduce his risk. He has accumulated `15 lakhs in an Equity fund but does not want to pull out all the money at once. Here is what he can do-
1) He starts an STP to transfer money from the Equity fund to Debt fund or Liquid fund. This will help him reduce his exposure to equity.
2) He can sell the units of the Debt fund whenever he needs this money.
3) He can also start a Systematic Withdrawal Plan so that money can be transferred to his account on a periodic basis.
Scenario 3- Equity Fund to ELSS
Money can be transferred from Diversified Equity fund to an ELSS scheme of the same fund house.
Take example of Niraj who has accumulated 5 lakh in Equity diversified fund. He does not want to sell it and then invest the money in a fund to avoid transactions costs. This is how he can save his tax-
1) He makes a STP from Equity fund to ELSS fund of the same fund house.
2) Periodic transfers of the money are effected as per instructions.
3) ELSS will provide tax benefits as well.
Thus, in the wake of volatile markets, rising transaction costs and taxes, Systematic Transfer Plan can prove to be useful in many ways. So, when are you becoming ‘STP Friendly’!!!
What is a Systematic Investment Plan? How does it work?
Feb 5, 2015, 12.28 PM IST
A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
How does it work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme.You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding.
With volatile markets, most investors remain skeptical about the best time to invest and try to ‘time’ their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor,your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.
Power of Compounding
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it." The rule for compounding is simple – the sooner you start investing, the more time your money has to grow.
If you started investing Rs. 10000 a month on your 40 th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 60 th birthday – more than double the amount you would have received if you had started ten years later!
Other Benefits of Systematic Investment Plans
· Disciplined Saving – Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.
· Flexibility – While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.
· Long-Term Gains – Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.
· Convenience – SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.
SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.
Vision Consultancy for specified investment goals for the benefit of the investors & proper guidance about investment financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a budget which organizes an individual’s finances and sometimes includes a series of steps or specific goals for spending and saving in the future. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan is sometimes referred to as an investment plan, but in personal finance a financial plan can focus on other specific areas such as risk management, estates, college, or retirement.